How to Calculate TDS on your FD Interest

Fixed Deposits (FDs) allow you to fully utilise Section 80C, which allows you to deduct Rs 1.5 lakh from your taxable income. It also provides capital protection as well as some interest income. The interest earned on the fixed deposit, on the other hand, is taxed, and oftentimes, this tax is neglected or paid late.

Read on to know more about this tax, and how it is calculated.

What is Tax Deducted at Source (TDS)?

When you receive certain payments, the person making the payment must deduct tax first. TDS stands for tax deducted at source, which is paid to the government.

Income tax is deducted at the source from money paid at the time of making income payments. This could include any income you earn such as commission,  salary, or sources such as investments, rent, interest, and so on.  In most cases, the person who receives money is responsible for paying income tax. 

Tax deducted at source (TDS) regulation is the government’s way of ensuring that this income tax is paid in advance. Therefore, you receive your net income after tax deduction.

You will receive a tax-free credit for the amount you paid. The gross amount must subsequently be included in your income when filing your income tax return. TDS credit is given from the entire tax liability, or a TDS refund is given in the case of no tax due.

What is a Fixed Deposit (FD)?

A fixed deposit is a type of investment that allows investors to put their spare cash into bank deposits and receive guaranteed returns. These returns are determined using preset bank FD rates over a set length of time. The rate of interest is fixed, as the name implies, and does not fluctuate with market fluctuations.

TDS on FD

The interest earned on a FD, whether made with a bank or a non-bank financial institution, is subject to TDS. TDS on FDs can be checked using Form 16A or your bank’s Quarterly Interest Certificate. Both of these forms also reflect the amount of interest that has been earned over time.

TDS on FD interest rates

TDS is imposed if interest income exceeds certain thresholds in any given fiscal year. TDS is levied by banks at a rate of 10% on earned FD interest over the course of a financial year. When your interest surpasses Rs. 40,000 in a fiscal year and your income does not fall under the exempted bracket, this amount is deducted. Senior citizens(over the age of 60) earning under 50,000 in interest income in a fiscal year are exempt from TDS on FD.

You can inform your bank not to deduct tax at the source if you do not earn interest income beyond the set limitations. You can apply for tax relief as an Indian resident by submitting Form 15H or Form 15G to your bank. Form 15H is for senior citizens, and Form 15G is for those who do not have to pay TDS on interest. Both forms feature a self-declaration section where you can say that tax on your expected income for the current fiscal year is non-deductible.

How is TDS on FD interest rates calculated?

TDS is deducted at a 30% rate on interest generated on FDs for NRI (Non Resident Indians) investors, as per Section 195 of the Income Tax Act (1961). The deduction is also subject to surcharge and cess.

If you do not provide your PAN details for the FD account with your bank, you will be charged a 20% TDS. TDS on FDs is deducted against the principal account holder’s PAN details for joint account holders. The deductions do not apply to the secondary holder of the account.

TDS on fixed deposits is usually deducted automatically by banks at the conclusion of the fiscal year. In addition, interest generated on a tax saver fixed deposit qualifies for a tax deduction.

It is critical to realise that if interest earned exceeds the above-mentioned restrictions, it is liable to taxation. The amount invested in an FD as a whole is not subject to the deduction.

Things to remember

The TDS is calculated by your bank when your deposit interest is due, not when the bank pays it. This means you pay TDS on interest income each year, rather than when your FD matures.

You can file an Income Tax Return (ITR) and claim a refund if your bank deducted tax at source but you are eligible for a reduced tax rate. Furthermore, if you are subject to a high tax bracket of 20% or 30%, you must pay TDS using a self-assessment tax form.

Conclusion

It is quite important for everyone to learn how to use money smartly, so that it works for them and not vice versa. Fixed Deposits are one of the popular financial vehicles for growing money and collecting guaranteed interest. The accrued interest income, on the other hand, is completely taxable under the Income Tax Act of 1961.

If the interest you earn is taxable, the amount deducted from your fixed deposit investment’s income is Tax Deducted at Source (TDS).

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