Fixed deposits (FDs) are a popular choice for investors in India seeking safety and guaranteed returns. However, many overlook crucial tax implications that can silently eat into their earnings. CA Nitin Kaushik sheds light on what most investors miss.
The Hidden Drain: How FD Interest is Taxed
“FD interest is taxable whether or not you actually receive it,” explains Chartered Accountant Nitin Kaushik. “Most people assume they only need to pay tax when the money comes to them, but that’s not how the tax system works. The moment interest accrues, it’s considered income and reported by banks to the Income Tax Department.”
This becomes particularly problematic when annual FD interest crosses ₹40,000 (or ₹50,000 for senior citizens). At these thresholds, banks are legally required to deduct Tax Deducted at Source (TDS) automatically, regardless of the depositor’s overall tax liability.
Unnecessary Losses for Low-Income Earners
“This is where many low-income investors lose money unnecessarily,” Kaushik notes. “Even if someone’s total income is below the basic exemption limit, the bank still deducts TDS unless Form 15G or 15H is submitted in advance.”
- Form 15G (for individuals below 60) and Form 15H (for senior citizens) are self-declaration forms. They inform banks not to deduct TDS if the individual’s total income is below the taxable limit. “Submitting these forms annually before March 31 can prevent unwanted deductions and avoid the hassle of claiming refunds later,” Kaushik advises.
This crucial step is often missed, with many investors unaware of TDS deductions until they check Form 26AS or AIS. Reclaiming this money necessitates filing an income tax return and waiting for a refund, a process many small investors find burdensome.
CA Nitin Kaushik’s Essential Checklist for Smart FD Investors:
- Track All FD Interest: Annually monitor interest income across all your bank accounts.
- Assess Your Total Income: Compare your total income against the basic income tax exemption limit.
- Proactively Submit Forms: If your income is below the taxable threshold, submit Form 15G/15H at the beginning of every financial year to prevent TDS deductions.
“FDs may be safe, but that doesn’t mean they’re always efficient,” Kaushik warns. “Without proper documentation and tax awareness, even safe investments can turn into silent money losers.”
Understanding FD Taxation in Detail:
- How FD Interest is Taxed:The interest income earned from FDs is added to your total income and taxed according to your applicable income tax slab. This interest is reported under the head ‘Income from Other Sources’ in your Income Tax Return (ITR).
- Section 80TTB: Interest Deduction for Senior Citizens (Old Tax Regime)Resident senior citizens who opt for the old tax regime can claim a deduction under Section 80TTB for interest earned on savings accounts, fixed deposits (FDs), and recurring deposits. The maximum deduction allowed is ₹50,000 per financial year, or the actual interest income earned, whichever is lower.
- Section 80C: Deduction on FD Principal (Old Tax Regime)Under the old tax regime, investments made in tax-saving fixed deposits (with a minimum lock-in period of five years) are eligible for deduction under Section 80C. The maximum deduction allowed under this section is ₹1.5 lakh per year, covering the FD principal along with other eligible investments and expenses.