Fixed Deposits (FD) are popular financial instruments for growing money and earning assured interest on your savings. However, the accrued interest income is fully taxable as per the Income Tax Act, 1961.
If the interest you earn falls under a taxable slab, the amount subtracted from the income on your fixed deposit investment is Tax Deducted at Source (TDS). Let us understand TDS rates applicable on FDs.
How is TDS on fixed deposit calculated?
TDS is applicable if the interest income exceeds specified limits in any provided fiscal year. Banks levy TDS at a 10% rate on the earned FD interest in a financial year. This amount is only deducted when your interest amount exceeds Rs. 40,000 in a fiscal year, and your income does not fall under the exempted slab.
If you are a senior citizen (an individual over the age of 60 or more), no TDS applies if your interest income is lower than Rs. 50,000 for the given year. For NRI or Non-Resident Indian investors, TDS is deducted on the interest earned from FDs at a 30% rate, as per Section 195 of the Income Tax Act (1961). Surcharge and cess also apply to the deduction.
20% TDS is charged if you do not share your PAN details for the FD account with your bank. For joint account holders, TDS on FD is deducted against the PAN details of the primary account holder. Here the deductions do not apply to the secondary account holder.
Banks typically deduct TDS on fixed deposits at a fiscal year’s end automatically. Besides, interest income earned from a tax saver fixed deposit is also liable for the tax deduction.
It is crucial to understand that the interest earned is subject to taxation if it exceeds the limits mentioned above. The principal amount invested in an FD is not liable for the deduction.
How to apply for a TDS waiver on FDs?
If you do not earn interest income above the defined limits, you can inform your bank not to deduct tax at the source. As an Indian resident, you can apply for tax remission by submitting Form 15H or Form 15G to your bank. Here, Form 15H is for senior citizens and Form 15G is for whom the interest is not chargeable for TDS.
Both the forms have a self-declaration section where you state that tax on your income (estimated) for the given financial year is non-deductible.
Things to remember about FD tax deductions
Your bank calculates the TDS when your interest is due for the deposit and not when the bank pays it. This means that you pay the TDS on interest income annually and not when your FD matures.
If your bank has deducted tax at source, but you are applicable for a lower tax rate, you can file an Income Tax Return (ITR) and claim the amount as a refund. Besides, if you fall under a high tax slab of 20% or 30%, you must pay TDS through a self-assessment tax form.
