A fixed deposit (FD) is a financial asset offered by banks or non-banking financial companies (NBFCs) that includes the deposit of a lump sum amount for a set period of time at a specified interest rate. If opposed to a savings account, FDs pay a higher rate of interest and are entirely taxable. It will be added to your gross income and taxed at the slab rates that relate to your total income. While filing your IT return you can get the specifics of the same under the head 'Income from Other Sources'. Fixed Deposits (FDs) enable you to fully use Section 80C, which allows you to subtract Rs 1.5 lakh from your tax liability. In this article, we will discuss the ways to avoid TDS and avail tax benefits on FDs.
How interest income from fixed deposits is completely taxable?
Fixed Deposit interest income is entirely taxable. It will be added to your gross income and taxed at the slab rates that relate to your total income. The bank deducts this tax at the source as they credit the interest income to your account. If you have a three-year fixed deposit, the bank will subtract TDS at the end of each year. The TDS (that has been subtracted) will be measured against your total tax liability by the Income Tax Department. Include interest income in your gross income and owe tax on it even though no TDS is withheld. If you pause until your FD matures until receiving interest, your overall interest income will drive you into a tax bracket, allowing you to pay the additional tax. By looking at your Form 26AS, you can see the specifics of TDS deducted from all of your income. If any tax is due after including interest in your net income, you must submit it by March 31st, the end of the fiscal year. If you receive a great deal of money from interest, you may have to pay Advance Tax on a quarterly basis.
TDS on fixed deposits
The bank will not subtract any TDS if the gross interest income from all FDs with the bank is less than Rs 40,000 per year. In the instance of a senior citizen aged 60 and over, the cap is Rs 50,000. To learn more about TDS on fixed deposits, refer to the following points:
- From all of your FDs with the bank, the bank determines your annual interest income. If your interest income surpasses Rs 40,000 (Rs 50,000 for senior citizens) you will be subject to a 10% TDS deduction. If you do not submit your PAN number to the bank, they will subtract 20% TDS from your deposit. As a consequence, double-check that the bank has your PAN number or not.
- When the total income is less than the taxable limit, no TDS is deducted. When a person owes no tax, the bank is unable to subtract TDS. That being said, when you submit Form 15G or 15H to claim interest income without TDS, the bank will not subtract TDS.
- The best alternative to ensure that the Bank does not subtract TDS is to submit Form 15G and Form 15H to your respective bank. To prevent the inconvenience of additional TDS deduction and resulting refund from the IT Department, submit these forms at the beginning of every fiscal year.
- Senior citizens with interest income from fixed deposits, savings accounts, recurring deposits can claim tax deduction up to a limit of Rs 50,000 per annum. Hence, the bank will not subtract any TDS if the senior citizen's interest income from all FD accounts with the bank is less than Rs 50,000 in a year.
Ways to avail tax benefits on FDs
The strategies for receiving income tax benefits and preventing TDS on FDs are described below.
Invest in tax-saving fixed deposits
A tax-saving fixed deposit is one in which you can deposit and claim a tax deduction under Section 80C. If a person opts for the old/existing tax regime, you can assert a tax benefit for contributions up to Rs 1.5 lakh in a financial year by participating in tax-saving fixed deposits under Section 80C of the Income-tax Act. For investments made in tax-saving fixed deposits, a person can claim a deduction of up to Rs 1,50,000 in a financial year (under the common Section 80C of the Income-Tax Act, 1961). To settle at net taxable income, the amount thus invested is withheld from gross taxable income. Premature withdrawals are not permissible on these deposits, which have a 5-year lock-in duration. Check the current interest rates on tax-saving FDs here.
Apply for a loan against FD
People obtain loans from a number of lenders while they are in a financial emergency. Obtaining loans against fixed deposits (FDs) from banks is just one of those options. This is a fast and simple way to get a short-term loan. Rather than unnecessarily withdrawing their FD, depositors can readily apply for a loan against their FD. A loan against FD (Fixed Deposit) is a form of secured loan in which customers pledge their fixed deposit as collateral in exchange for a loan. The loan balance is determined by the amount of the FD deposit. This can be somewhere between the deposit amount of 90% - 95%. Tax-saving fixed deposits can be kept in either a single or joint account, depending on the account holder's choice. In the case of a joint account, though, the tax advantage can only be received by the first account holder. All fixed deposit holders, whether individuals or those with joint accounts are liable for a loan against their fixed deposits. This form of loan is not applicable to holders who have a 5-year tax-saving FD. Banks use the customer's FD as security when granting a loan against a fixed deposit. As a result, the loan is now assured. Due to the fact that it is a secured loan, the interest rate is low. If the investor is unable to repay the loan, the bank can quickly recover the funds from the FD. This amount is usually determined at the date of maturity.
Invest in post office FD
Rather than going to a bank, you should make a Fixed Deposit at a Post Office branch. On Post Office Fixed Deposits, no TDS is withheld. If deposited in 5-year term deposits, depositors can claim up to Rs. 1,50,000 in tax benefits under Section 80C of the Income Tax Act, 1961. Interest rates on post office FDs are better than those available on the market. The current interest rate varies from 5.5 percent to 6.7 percent on tenure ranging from one to five years.
How to file Form 15G/Form 15H online?
Instead of submitting these forms to a bank branch, individuals can file it online. If your bank allows you to file Form 15G/H online through Net banking you can file Form 15G or Form 15H by following the below listed basic steps:
- Visit the net banking portal of your bank and sign in to your account using the required credentials i.e. User ID and Password.
- Head to the tax section and click on Form 15G/Form 15H
- Fill the form with all the required details and click on 'Submit'
- Download the acknowledgement slip and note the service request number for potential use.