Fixed Deposits (FDs) stand as a reliable choice for individuals seeking financial stability and steady returns. However, the taxation aspect, specifically the Tax Deducted at Source (TDS) on FD interest, is something every investor must comprehend. In this comprehensive guide, we will delve into the essential information about TDS on FD interest, spanning both Bank FDs and Non-Banking Financial Company (NBFC) FDs.
Understanding TDS on FD Interest
TDS, or Tax Deducted at Source, serves as a taxation mechanism mandated by the government. It necessitates that the payer deducts a portion of the total payment and remits it to the government on behalf of the recipient. In the context of FD interest, banks and NBFCs act as deductors and are responsible for deducting TDS when the interest earned exceeds a prescribed threshold.
TDS on Bank Fixed Deposits
Threshold Limit: The threshold for TDS on Bank FD interest is ₹40,000 for individuals and ₹50,000 for senior citizens per financial year. If the interest earned on your Bank FD crosses this threshold, the bank will initiate TDS.
TDS Rates: The TDS rates for Bank FDs depend on your PAN (Permanent Account Number) status and the terms of the FD. Individuals furnishing their PAN details incur a TDS rate of 10%. However, if PAN details are not provided, the TDS rate escalates to 20%.
Benefits for Senior Citizens: Senior citizens enjoy a more lenient threshold before TDS comes into play, which can be advantageous for those relying on FD interest as a source of income.
Form 15G/15H: If your total income falls below the taxable limit and you want to prevent TDS deductions, you can submit Form 15G (for individuals) or Form 15H (for senior citizens) to the bank. These forms declare that your income is under the taxable threshold.
Tax Saver FD Interest: Tax Saver FDs, locked in for a minimum of five years, are not subject to TDS on interest. Nevertheless, the interest earned on these FDs is taxable upon maturity.
TDS on NBFC Fixed Deposits
Threshold Limit: For NBFC FDs, the threshold for TDS on interest stands at ₹5,000 per financial year.
TDS Rates: TDS rates for interest earned on NBFC FDs also stand at 10% for individuals with a valid PAN. In the absence of a PAN, the rate elevates to 20%.
Form 15G/15H: Like in the case of Bank FDs, individuals can submit Form 15G or Form 15H to NBFCs if their total income falls below the taxable limit, allowing them to avoid TDS deductions.
Understanding TDS on FD Interest Calculation
Let’s simplify how TDS on FD interest works with an example. Suppose you hold an FD with a bank or NBFC, and the interest earned during the financial year amounts to ₹45,000. For an individual, this surpasses the ₹40,000 threshold. Consequently, the bank or NBFC will apply a 10% TDS rate, which totals ₹4,500. You will receive the remaining ₹40,500.
It is crucial to note that TDS being deducted doesn’t signify tax exemption. The interest income must be declared while filing your income tax return.
Filing Income Tax Returns for FD Interest
The deducted TDS amount is merely an interim measure. To ensure accurate tax payment on your FD interest, it’s necessary to file your income tax returns. This process enables the computation of your total income, declaration of deductions, and determination of your actual tax liability. If your total income falls within the taxable limit, you may qualify for a refund of the TDS amount deducted.
Exemptions and Deductions
Certain exemptions and deductions are available to alleviate the impact of TDS on FD interest:
Section 80C: If you possess investments or expenses qualifying for deductions under Section 80C of the Income Tax Act, you can utilize them to reduce your taxable income. Nevertheless, this deduction is subject to an overall limit of ₹1.5 Lakhs per financial year.
Senior Citizens: Senior citizens usually encounter higher TDS thresholds, making them less susceptible to TDS deductions on their FD interest.
Reinvestment in FDs: The interest earned on FDs is considered taxable income. Nevertheless, opting to reinvest this interest in the same FD or another one designates it as a source of income.
Conclusion
Understanding TDS on FD interest is pivotal for anyone engaged in Fixed Deposits, whether through banks or NBFCs. Vital takeaways include recognizing the threshold limits for TDS, the corresponding TDS rates, and the availability of Form 15G or 15H for those with income below the taxable threshold. Moreover, it is imperative to recognize that TDS is just an interim procedure, and filing income tax returns is essential to compute your actual tax liability.
Although TDS on FD interest may appear as an additional procedure, it is an integral facet of the broader tax system intended to ensure proper taxation and compliance. To make the most of your FD investments, it is advisable to actively comprehend and manage the tax implications, permitting you to enjoy the benefits of FDs while meeting your tax obligations.
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