People often asks, is interest on Fixed Deposits taxable? What is the exemption limit of TDS on FD interest? When and How Tax is to be deducted from interest on fixed deposit?
In this article, we have discussed provisions related to tax deduction on interest on fixed deposits and answered most of the frequently asked questions.
Interest on fixed deposit is chargeable to tax under the head “income from other sources”. However, amount invested on a fixed deposit for a tenure of 5 years is eligible for tax deduction under section 80C. To know more, you can refer article on tax deduction on fixed deposit u/s 80C.
TDS on interest on fixed deposit
If interest on Fixed Deposits exceeds Rs 40,000 in a financial year, it would be eligible for tax deduction at source (TDS) under section 194A at the rate of 10%. For the financial year 2021-22, TDS rate is 10%.
However, if the bank does not have your PAN details, then tax will be deducted at the rate of 20% (section 206AA) instead of 10% from your interest on fixed deposits. Therefore while opening your FD, you should make sure that the Bank has your PAN or else give a copy of your PAN to update your KYC.
For senior citizens, the limit fixed is Rs. 50,000. This means, if the recipient is a senior citizen, then tax has to be deducted from FD interest if during the financial year it exceeds Rs. 50,000.
When and How tax is deducted from Interest on Fixed Deposit?
Please note, Limit of Rs 40,000 is per bank per individual.
If you have fixed deposit with more than one bank and all of them are earning interest amount of more than Rs 40,000 but none of a single bank is paying interest of more than Rs 40,000, then tax will not be deducted from your interest on Fixed Deposits.
In case interest is received from different branches of the same bank, TDS provisions will be applicable, only if total interest on fixed deposits from a single bank exceeds Rs. 40,000 per year.
For instance, if interest on fixed deposit is Rs 60,000 for the financial year 2020-2021, TDS @10% has to be deducted as the amount exceeds Rs 40,000 limit. In this case, TDS amount of Rs 6,000 (i.e. 10% on Rs 60,000) has to be deducted. Balance Rs 54,000 has to be paid to the customer.
If an investor is not liable to tax, then he can submit form 15G/15H stating that his income is not taxable for the financial year. Based on this form, bank should not deduct tax on interest on fixed deposits. Form 15H is applicable to senior citizen (Indian resident aged 60 years or above), others can use form 15G.
Validity of form 15G/15H is only for a financial year. Assessee is required to submit these forms every year to claim nil or lower tax deduction on interest on fixed deposits. To know more read our article on form 15H and 15G.
In case of senior citizens, Budget 2018 has increased limit for non-deduction of Tax from FD interest to Rs 50,000.
Remember, bank deducts tax on interest on fixed deposit when interest amount is credited or paid by the branch of the banking company not when FD matures.
For instance, if you have a 3 years FD with state bank of India, then SBI will be deducting tax on interest amount when it exceeds Rs 40,000 per year irrespective of whether FD matures or not. Every year tax will be deducted and at the end of 3rd year, you will be getting your principal amount invested plus balance interest amount earned net of TDS.
When Section 194A is not applicable
In certain cases provisions of section 194A is not applicable. This means, the deductor will not be deducting tax from your FD interest u/s 194A. Here are the most important cases where section 194A is not applicable.
- When the aggregate amount of interest credited or paid during the financial year does not exceed Rs. 40,000 or Rs. 50,000, as the case may be.
- Interest credited or paid by the firm to its partners.
- Interest credited or paid in respect of deposits under the schemes of post office (time deposits), post office (recurring deposits), post office montly income account, kisan vikas patra, national saving certificate VIII issue, and indira vikas patra.
- Interest is paid on compensation awarded by the Motor Accident claims Tribunal if the amount of payment or the aggregate amount of such payment does not exceed Rs. 50,000.
How to find TDS details
Bank has to issue TDS certificates in form 16A based on the number of quarters in which tax has been deducted on FD interest. Such certificate will be available at traces portal after filing TDS returns by the bank with the department.
Form 16A will have all the details including, tax deducted, interest paid, bank’s PAN, address and TAN etc.
If you didn’t get these certificates, you can trace out your TDS details in form 26AS available at income tax site. You can download or view form 26AS from Income tax e-filing portal with your login ID and password. The Form 26AS will include record of all the TDS payments deducted on your Fixed Deposits.
If bank has deducted higher tax at the rate of 20% for not having customer’s PAN with them, then such thing can be rectified by the bank by filing revised TDS return. For this, you need to provide your PAN details to the bank. After filing revised return, you can see the TDS amount in form 26AS at income tax e-filing portal.
If you are not liable to income tax but bank has already deducted TDS on interest income earned on fixed deposits, then refund can be claimed by filing your tax return with tax department.
While filing your tax return you need to consider total interest earned on fixed deposits irrespective of whether TDS has been deducted or not.
