If you are considering putting your hard-earned money in an investment scheme, fixed deposits (FDs) are a popular option that offer assured returns. However, it is crucial to understand that the interest accrued on fixed deposits is taxable. Whether you are an expert investor or a beginner, understanding the tax rules governing FD interest will help you manage your finances better. Continue reading to find out more about paying income tax on FD interest.

What Is the Tax Process for Income Generated from Interest?

Interest earned from fixed deposits is considered part of your total income, and taxed at the current income tax rates. You must include it under the “Income from Other Sources” section in your Income Tax Returns (ITR).

How To Calculate Tax on Interest Income from Fixed Deposit?

Follow these steps to calculate tax on interest income from FDs:

  1. Determine the overall interest you have earned from all your FD accounts.
  2. If you are below 60, find out your tax slab rate. Use that tax rate to determine how much income tax you must pay on the interest you receive from FDs.
  3. If you are a senior citizen, you must determine whether your interest income is below Rs. 50,000. If so, you can claim a deduction for the entire interest amount, which means you don’t have to pay income tax on the FD interest. However, if the sum exceeds Rs. 50,000, you will be required to pay tax on the interest based on your tax slab rate.
  4. If your yearly interest income exceeds Rs. 40,000 (Rs. 50,000 for senior citizens), the bank will deduct a Tax Deducted at Source (TDS). You can deduct this TDS from your computed tax because it has already been paid on your behalf.
  5. If you are not eligible for a TDS deduction, you can notify the bank that you are not required to pay any tax on the interest earned by submitting Form 15G or 15H.

How to Reduce or Save Tax on Fixed Deposits?

Invest in Tax-Saving FDs: Opt for a 5-year FD scheme offered by a bank to qualify for a deduction under Section 80C, on your investment amount. You can get a maximum discount of up to Rs. 1.5 lakhs. Therefore, investing Rs. 1.5 lakhs in this scheme will allow you to lower your tax burden by Rs. 45,000, if you are subject to the maximum tax rate of 30%.

Invest in Senior Citizen FDs: Senior citizen FDs generally provide higher interest rates than regular FDs, and offer tax benefits under Section 80TTB of the Income Tax Act. Senior citizens are qualified for a deduction of up to Rs. 50,000 on the interest income accrued from their FDs.

Submit Form 15G/15H: If your yearly income is less than Rs. 2.5 lakhs, you can submit form 15G/15H to declare that your income does not exceed the taxable limits, and as a result, you are not required to pay any taxes. .

Final Thoughts

Make sure to declare the interest earned from your FDs when you file your tax returns. Be aware of available deductions and exemptions to minimise your tax payment. Staying well-informed, and strategically planning your finances can help you make the most of your FD investments, while meeting your tax requirements.