Fixed Deposit Taxation: How Much FD Interest is Tax-Free

In India, bank fixed deposits (FDs) are very popular as they offer a fixed rate of interest higher than savings accounts and are generally less risky than stocks and bonds. However, it is important to understand the taxation laws around bank fixed deposits before investing.

If you are wondering how much FD interest is tax free, this article will answer your questions and help plan your investments better.

What are tax-saving fixed deposits?

Generally, fixed deposits aren't tax-free. However, Section 80C of the Income Tax Act allows a deduction of up to Rs. 1.5 lakh against your taxable income if you invest in a 'tax-saving fixed deposit' as specified under the Bank Term Deposit Scheme 2006.

Tax-saving fixed deposits can be made only with a scheduled bank and for a minimum of five years. You cannot withdraw these fixed deposits prematurely, nor can you pledge them to get a loan if you so desire. In the case of a premature death of the first holder, the survivor can withdraw the money prematurely. It is possible to make these either singly or jointly, but the tax benefit is only available to the first holder in the latter case.

How much interest on FD is tax-free?

Interest on fixed deposits is taxable under 'Income from other sources' and is taxed at the slab rate applicable to you. In such a case, if you fall under the top tax bracket, interest on fixed deposits may be taxed at 30% plus applicable cess and surcharges.

A taxpayer has the option to classify their taxable income under:

• Profits and gains from business or profession, as well as
• Other sources of income, either accrued or received

This means you can specify the interest accrued on your fixed deposit year after year for cumulative FDs with tenures over a year, even if you have not received the interest. However, if you choose to have the interest credited to you, you must mention the full interest on the cumulative FD matured during the year.

To ensure that your income accrues and gets taxed evenly, it is advisable to follow the accrual basis for offering the income for tax. Also note that banks deduct TDS on accrual basis. Therefore, it is better to report FD income on an accrual basis rather than a received basis to match TDS claims.

You can request a certificate of interest accrued on your fixed deposit after the end of the year if you follow the accrual basis. This will help you file your taxes accurately.

How to discharge taxable FD interest

Banks are required to deduct tax at source in case interest to be credited during the year on all your deposits is likely to exceed Rs. 40,000 (Rs. 50,000 for senior citizens). Once the amount crosses this threshold, tax is deducted at 10% on the full interest credited during the year.

Tax deductions at source do not absolve you of your tax liability. The interest income you receive will be taxed based on your highest tax slab, whereas the TDS is deducted at a fixed rate of 10%. You may either be eligible to receive a refund for TDS or have to pay additional tax over and above the TDS already deducted. In case the customer does not have a valid PAN, a 20% TDS rate is applied.

In case your tax liability for the year is zero, you can submit Form 15G to the bank for TDS exemption (senior citizens must submit Form 15H). This way, your funds will not be blocked unnecessarily.

If you see further tax liability over and above the TDS, and this exceeds Rs. 10,000, you have to pay advance tax in four instalments. Senior citizens who do not generate business income do not have to pay advance tax. Those seniors who have a tax liability below Rs. 10,000 should discharge their tax liability by submitting their ITR before the due date. If the ITR is not filed by the due date, punitive interest will apply.

Deduction available for interest received on fixed deposits

No deduction is available with respect to interest on fixed deposits, except for resident senior citizens who are allowed to claim deduction up to Rs. 50,000 under Section 80TTB. The deduction is available for any form of interest (savings account, fixed deposit, recurring deposit) received from banks, post offices, and cooperative societies during the year.

Now that you know how much FD interest is tax-free, it's time to start exploring the best FD offerings.
Visit the IDFC FIRST Bank website or branch to take advantage of the best interest rates on fixed deposits and to know more about tax-saving FDs. Besides competitive interest rates, the bank offers quarterly compounding, which accelerates the growth of your money.