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All You Need to Know About TDS on Fixed Deposit Earnings

Fixed Deposits or FDs have been a traditionally popular investment option in India. Guaranteed returns over a fixed tenure make FDs an excellent investment for risk-averse investors. However, the interest generated from FD is fully taxable as per the applicable tax slab.

Moreover, banks deduct TDS (Tax Deducted at Source) from the FD interest if it exceeds the threshold amount fixed by the tax department. Here’s everything you should know about TDS and taxes on FDs.

What is TDS?

TDS or Tax Collected at Source is a mode of tax collection. The person/entity making the payment is responsible for deducting taxes directly from the income, asset sales, or dividends and paying the balance amount to the payee.

The TDS rates are already set, and the payer deducts taxes as per the applicable rates. It is applicable on salary, interest income, property sale, rent, commission, professional fees, etc. After collecting TDS, the payer has to claim it with the tax department.

TDS ON FDs

Now that you know what is TDS, here is a quick overview of the TDS rate on interest earned from FD. The banks or NBFCs are required to deduct 10% from the interest income if the interest income of a customer for the financial year exceeds ₹10,000.

From FY 2019-20, the limit has been increased to ₹40,000 for non-senior citizens and ₹50,000 for senior citizens. In the case of company FD, the limit is revised to ₹5,000. Also, if the customer has not provided PAN, TDS will be applicable at 20%.

FD TDS Example

Let us assume that Mr. Rajiv (30 years) belongs to the 20% income tax slab. He opened an FD of ₹1 lakh at 6% p.a. So, the interest income from the FD will be ₹6,000. The bank will not deduct any TDS as the interest income is lower than the minimum threshold of ₹40,000 for non-senior citizens.

Let us take another example. Mr. Akhilesh (45 years) belongs to the 20% tax slab. He opened an FD of ₹10 lakhs at 6% p.a. So, the interest income for the year will be ₹60,000. As ₹60,000 is higher than the minimum threshold limit of ₹40,000 for non-seniors, the FD provider will deduct TDS at 10%, that comes to ₹6,000.

Form 15G and 15H

Only taxpayers liable to pay income tax must pay TDS on their FD interest income. Seniors are not liable to pay TDS if their total income from investments in a financial year is below ₹2.5 lakhs.

If you fall in the NIL tax bracket or are a senior with investment income below ₹2.5 lakhs, you can submit Form 15G (for below 60 years) or 15H (for above 60 years) to the FD provider at the beginning of the financial year to ensure that they do not deduct TDS. People belonging to the NIL tax bracket can also claim a TDS refund by filing tax returns.

Understanding Tax Implications of FD Investments

The TDS mechanism enables the tax department to collect taxes directly from the payment source. It helps prevent tax evasion and streamlines the tax collection process.

If you plan to invest in FD, ensure that you clearly understand the tax implications and how TDS can reduce your overall interest income to avoid discrepancies.

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