Today, most fixed deposit issuers offer attractive FD rates, allowing investors to get the most out of their investment. They can also enjoy assured returns and security of funds. As such, investing in fixed deposits is considered a lucrative option for wealth accumulation, especially for risk-averse investors.
However, the interest on FD is subject to TDS deduction as per the provisions of Section 194A. Given this, investors must carefully plan their investment to maximise returns.
When is TDS Deducted?
The issuer is liable to deduct TDS on FD interest as per the provisions outlined in Section 194A of the Income Tax Act, 1961. According to this section, TDS is to be deducted under the following circumstances:
- If interest from the FD for a year exceeds ₹40,000 (for regular investors)
- If interest from the FD for a year exceeds ₹50,000 (for senior citizen investors)
Here are some other points to note about the applicability of TDS deduction on interest:
- No TDS will be deducted if interest from one issuer does not exceed the limit
- No TDS is deducted u/s 194A if the investor is an NRI
Here are a few scenarios to help better understand when issuers will deduct TDS from interest earnings:
- Example 1
Suppose an individual has deposited ₹1.5 Lakhs with XYZ issuer, and the applicable interest rate is 7.5% p.a. for 1 year. Here, their interest for a year will be ₹11,250, which is under ₹40,000, so TDS will be deducted.
- Example 2
Suppose an investor has 3 FDs of ₹2 Lakhs each in three branches of ABC bank, and the interest rate is 8% p.a. Here, their annual interest for each deposit will be ₹16,000, but the total interest will be ₹48,000.
Since the issuer is the same for every deposit and the total interest exceeds the limit, TDS will be deducted. If the deposits had been with three different banks, no TDS would be deducted.
How Much TDS is Deducted?
The calculation of TDS on FD interest is also as per Section 194A of the Income Tax Act. According to this section, the issuer will deduct tax at the rate of:
- 10% if PAN is available
- 20% if PAN is not available
Here are a few examples of how the tax is calculated.
- Example 1
Suppose an investor earns interest of ₹55,000 for a given year and has provided PAN to the FD issuer. In this case, the tax will be deducted at 10%, which amounts to ₹5,500 (55000 X 10%).
- Example 2
Suppose an individual is earning interest of ₹45,000 in a year and has not provided PAN to the fixed deposit issuer. In this case, the issuer will deduct tax at the rate of 20%, which will amount to ₹9,000 (45000 X 20%).
Note that if the issuer deducts TDS on FD interest, they will deposit the same with the government. However, this does not mean that the investor must report the interest after the tax deduction. They will have to report the entire interest amount as income and claim a tax credit or refund when filing their return.
Tips to Avoid TDS on FD Interest
Here are some ways in which investors can avoid tax deduction on interest from a fixed deposit:
- Furnish Form 15G or 15H
If one’s total income for a financial year is below the basic exemption limit and their tax liability is zero, they do not have to pay taxes. In such instances, the issuer will not deduct TDS. However, submit this form at the beginning of the financial year.
- Invest With Multiple Issuers
Deduction of TDS on FD interest is applicable only when the interest earned from one issuer exceeds ₹40,000 or ₹50,000. If an individual invests with multiple issuers and their interest from all of them is under the threshold limit, there will be no tax deduction.
- Timing Investments
Issuers have to deduct tax only when the interest for a particular financial year exceeds the limits. So, if investors plan and time their investment, they can avoid the TDS deduction. They can use an FD calculator to quickly estimate their returns and invest accordingly.
With this information and tips, investors can smartly invest in an FD and secure maximum returns. Individuals must adhere to the income tax provisions to accurately file their returns and avoid any penalties associated with incorrect returns.
Use a fixed deposit calculator and compare their options before investing. They should also carefully read through the terms and conditions to ensure that they choose a feasible option as per their current finances and goals.
