For years one saving scheme which is considered to be the safest option and earns a higher rate of interest is fixed deposits. It is a better saving scheme because it protects savings from inflation and provides a low-risk return in real terms. Before you head to open the fixed deposits account, here are a few things you need to know.
Is interest earned on fixed deposits taxable?
The income earned from the fixed deposits interest is taxable. The interest earned is subject to income tax because it is classified as ‘income from other sources’. So, the interest earned is added to the total income of the taxpayer and the tax liability is according to the individual’s tax slab. For example, if you have an annual salary of Rs 12 lakh, your tax slab will be 30%, now you are liable to pay tax on your entire income, the tax will also include the income earned from fixed deposits in form of interest.
What is TDS?
TDS is known as Tax-Deducted at Source, the purpose of TDS is to collect tax at the source from where a person’s income is generated. TDS is applicable on salaries, dividends, interest received, the commission received, etc. TDS has different rates for different categories of people. The range is prescribed by the Income Tax Act and also, all people do not fall under the category of TDS. However, TDS can be adjusted later after filing returns, if the tax liability is lower than the TDS. If tax liability exceeds TDS then the taxpayer will have to pay an extra amount.
TDS rates for different category people applied from May 2020:-
| Category | Section | TDS rates applicable |
| Salaries | Section 192 | At applicable income tax rates, inclusive of cess |
| Receiving accumulated taxable part of PF Section | 192A | 10.00% |
| Interest received on securities | Section 193 | 7.50% |
| Dividends from mutual funds and shares | Section 194 and 194K | 7.50% |
| Interest other than Interest on Securities e.g. Fixed deposit interest | 194A | 7.50% |
| Winnings from the lottery, crosswords, or any sort of game | Section 194B | 30.00% |
| Winnings from horse races | Section 194BB | 30.00% |
| Payment of Contractors and sub-contractors | Section 194C | 0.75% |
| Insurance commission received | Section 194D | 3.75% |
| Life Insurance Policies not exempt under Section 10(10D) | Section 194DA | 3.75% |
| Payments made for the national saving scheme | 194EE | 7.50% |
| Payments made for mutual funds | 19F | 15% |
| Money won from games like lottery, poker | 194G | 3.75% |
| Commission or brokerage received except for Insurance Commission | 194H | 3.75% |
| Payment made while purchasing land or property | 194IA | 0.75% |
| Rent exceeding Rs 50,000 | 194IB | 3.75% |
| Payment is done for brokerage, commission exceeding Rs 50 lakh | 194M | 3.75% |
| Withdrawn cash for more than Rs 20 lakh | 194N | 2.00% |
| Payment of Professional Fees etc. | 194J | 1.5% |
| Rent for plant and machinery | 194- I(a) | 1.5% |
| Rent for immovable property | 194-I(b) | 7.50% |
| TDS on e-commerce participants | Section 194-O | 0.75% |
Source: Ministry of Finance Press release
Concept of TDS on the interest of fixed deposits
TDS is automatically deducted on the fixed deposit account at a time when the interest amount is disbursed in the account. TDS is deducted every year not when an investor receives the interest at a time of maturity. Let’s assume, Vibhor has invested Rs 10,00,000 for 1 year and he earns Rs 61,000 as an interest yearly, so, it will attract a 10% TDS deduction, so Rs 6100 will be deducted every year going forward and the investor will receive Rs 54,900 at the end of the year.
When do you pay tax on FD?
According to the new rules announced in the budget session of 2019-2020, the fixed deposits interest will attract 10% TDS if the income earned from the fixed deposit is more than Rs 40,000 earlier tax was deducted if the income from interest was Rs 10,000. For example, Ravi earns RS 45,000 from interest and Shweta earns Rs 30,000 from interest, in this case, TDS will be deducted from Ravi’s income at a rate of 10%.
Interest from FD for senior citizens
Some relaxation has been given to the senior citizens who have invested in fixed deposits and earn income in the form of interest. TDS is deducted if a senior citizen is earning more than Rs 50,000 per year from the interest of fixed deposits, this comes under the amendment vide Finance Act 2018. However, form 15H can be submitted by senior citizens if their income earned from the fixed deposits interest rate is less than the prescribed limit.
