A Fixed Deposit (FD) is a safe and reliable financial instrument—provided by banks as well as Non-Banking Finance Companies—where your principal amount is locked-in for a specified tenure, and earns you interest. It provides you with higher returns as compared to the traditional savings account. A fixed deposit is often the preferred mode of investment for investors because it provides dual benefits: one, the principal amount is safe, and the other; returns are guaranteed on the principal amount. FDs are safer than marked-linked investment instruments like equity funds. Before investing in an FD, you must consider the tax implications on the income received as the interest payout. Always remember that the amount earned on interest from an FD is subject to Tax Deduction at Source (TDS) according to your income slab.
The concept of TDS was introduced by the government to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same to the account of the Central Government.TDS has to be deducted at the rates prescribed by the tax department if the payment exceeds a certain threshold.
Financial institutions deduct TDS at the rate of 10% on interest payouts. In the present financial year (2019-2020), a TDS of 10% will be deducted if your income for the interest payout is above Rs 10,000. You must, however, note that the union government in the 2019 budget has increased the threshold limit for TDS deduction on the interest amount from Rs 10,000 to Rs 40,000. This will be applicable from the financial year 2020-2021 onwards. It means that an interest rate of 10% will be deducted, if your interest income from an FD is more than Rs 40,000 in a year.
Financial institutions will deduct 20% of the interest payout as TDS, if you have not provided your Permanent Account Number (PAN) information. So, you must make sure that you have provided your PAN details.
No TDS is deductible if your total income, including the income from the interest payout, is less than the minimum exempt income of Rs 2.5 lakh for the present financial year. For example, Ashok has a total income of Rs 2,40,000 in a year, of which 40,000 is from the interest payout. TDS will not be deducted in this case as his total income is in the bracket of being exempted from taxation. If you have a total income less than Rs 2.5 lakh, then you must submit Form 15G and Form 15H—both self-declaration forms—at the beginning of the financial year to claim relaxation from TDS. Alternatively, these forms can be submitted while filing returns to claim refund of the TDS amount.
In 2018, the union government provided for Section 80 TTB in the Income Tax Act for senior citizens. According to the provision, any taxpayer who is a resident senior citizen, aged 60 years and above at any time during a financial year, can claim Rs 50,000 as a deduction from the gross total income for the particular year of assessment. The income has to accrue from interest on bank deposits, including both savings and fixed, along with interest on deposits in a banking co-operative society and interest on post office deposits. So, for senior citizens, income from interest payouts up to Rs 50,000 cannot be deducted under TDS. A senior citizen has to submit Form 15H, a self-declaration form, at the time of receiving the interest amount from the financial institution, or at the time of filing annual return, to claim relaxation from TDS.
NRIs can invest in fixed deposits through their Non-Resident Ordinary (NRO) accounts. Financial institutions deduct 30% TDS on interest payouts to NRIs.
Though income earned from an FD is taxable under the category of ‘income from other sources’, you can save the TDS by using the following methods:
Distributing the fixed deposit investment: You can distribute your investments, across financial institutions, in such a way that the interest earned is less than the threshold limit for TDS deduction.
Splitting the FD: You can also save TDS by splitting your investments. For example, you can make two separate fixed deposits, one with your individual details, and the other; under a Hindu United Family (HUF) account. In this case both will be treated as separate FD accounts. You must, however, remember that you fulfil the eligibility conditions of being a HUF investor.
Timing the FD: You can also save TDS by timing multiple FDs in a manner that interest for any of the financial years is less than the threshold limit for TDS deduction. For instance, if you want to invest Rs 2 lakh in FD in a given financial year, you can invest Rs 1 lakh in April and the remaining amount in September. As the financial year closes on March 31, your interest will be split across two financial years.
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