Is Fixed Deposit Taxable or is it Tax-Free?

A fixed deposit is an investment option where you can deposit a lump sum amount in your FD account for a fixed tenor. On this amount, you earn compound interest over the investment tenor. Different banks offer different interest rates on your deposit. That said, the interest earned on fixed deposits is also a kind of income. More specifically, it is categorised as ‘Income from Other Sources’ under the Income Tax Act, 1961. 

This brings us to a very pertinent question — is FD interest taxable? The short answer is yes. The interest income from a fixed deposit is taxable. But there are many other finer details about FD interest taxation that you need to know. Check them out in the sections below.

Taxation on FD Interest 

Fixed deposit interest is added to your income and taxed at the income tax slab rate applicable on your total income. For example, say your total salary income for a given financial year is ₹6,00,000. In addition to this, say you earn ₹2,00,000 as interest from your fixed deposit during the year. 

In this case, your total income during the year will be ₹8,00,000 (assuming you have no other sources of income). And this income will be taxed at the following rates, depending on the tax regime you opt for:

• 20% if you choose the old tax regime

• 15% if you choose the new tax regime

As you can see, the interest on your fixed deposit is taxable at the same rate as your salary income. That said, in most cases, banks and NBFCs deduct taxes at source on the FD interest. 

Better Understanding of TDS related to Fixed Deposits 

When certain payments are made, the person making the payment has to deduct tax at the source and pay these taxes directly to the government. This is known as tax deducted at source (TDS). The interest on fixed deposits is subject to TDS, so banks and NBFCs are liable to deduct tax from your FD interest. The TDS on interest for fixed deposit is deducted by the paying entity at the end of every financial year. 

Here is a closer look at the rates of tax deducted at source on the interest earned on fixed deposits. 

Keep in mind that tax is only deducted by the bank or NBFC if the total interest earned on your fixed deposits during the year exceeds ₹40,000 (or ₹50,000 if you are a senior citizen). 

Taking all these details into account, let’s revisit the example discussed earlier. As mentioned above, you earn ₹2,00,000 as interest on your FDs during the year. If you are below 60 years of age, your bank or NBFC will deduct 10% of this interest as TDS before paying the income to you (assuming you have provided your PAN). This essentially means ₹20,000 will be deducted at source. 

How to minimise TDS on FDs 

Although the interest on fixed deposits is taxable at source, you can take some measures to ensure that TDS is not deducted at source. Here is what you can do. You need to submit Form 15G or 15H with your bank. 

Form 15G (or Form 15H for senior citizens) is a formal request by the FD holder to the bank to not deduct tax at source on your FD interest. If your total income for the financial year is below the basic exemption limit, you can fill up this form and submit it to avoid TDS on fixed deposit interest.

Tax Deductible on Fixed Deposits

The tax deductible on your fixed deposits is on the interest. As stated before, the deductible tax on fixed deposit interest is 10 percent, so, for instance if you have earned an interest of Rs. 45,000 for the year, your TDS would be Rs. 4,500. On the other hand if you have earned less than Rs 40,000 for the year as interest (Rs. 40,000 is the threshold) from all your fixed deposits, the bank will not deduct tax.

Conclusion

So, is FD interest taxable? The answer, as explained in the sections above, is in the affirmative. The income on FD is taxable. You may be exempted from income tax on fixed deposit interest if you invest up to ₹1.5 Lakhs in a tax-saver FD plan, which has a lock-in period of 5 years. In this case alone, the interest is exempt from tax under section 80C of the Income Tax Act, 1961.