Fixed Deposits and Tax

Fixed Deposit(FD) is an investment product which allows you to invest a lump of money for a fixed time period and at a fixed rate of interest. It is quite popular form of investing in India. Overview of Fixed Deposits as the name suggests give an overview of Fixed Deposits, while Fixed Deposit and Interest Rates discussed the interest rates in FDs. When you open a fixed deposit with bank then you are lending money to the bank and it pays you interest. Applicable interest rates will be given as on the date of receipt of the funds by the bank and is fixed for the specified duration. And interest that is earned on fixed deposits is taxable in the hands of the depositor.  Tax or TDS is deducted by the bank, after a threshold. This article throws light on Taxation aspect of Fixed Deposits.

Tax Deducted At Source or TDS

If the aggregate interest income from fixed deposits that you are likely to earn for all your deposits held in a branch is greater than Rs 10,000 in a financial year, you become liable for TDS. TDS is deducted every time the Bank pays interest during the financial year and the interest earned for the year is more than Rs 10,000 in a single branch. In addition, TDS is also deducted on interest accrued (but not yet paid) at the end of the financial year.For example, if an investor has earned Rs 20000 as an interest in one year, then the bank would deduct Rs 2000 and pay only Rs 18000 as the amount exceeds the limitation of Rs 10000.

A consolidated TDS Certificate in Form 16A, for TDS deducted during a financial year will be issued in the month of April of the following financial year. TDS Certificate shall specify valid Permanent Account Number (PAN) of the deductee, valid Tax Deduction Number (TAN) of the branchChallan identification Number and receipt No of the quarterly statement. Challan identification Number means BSR code of the branch where tax has been deposited, date on which deposited and challan serial number given by the bank.

Some points to note for Fixed Deposits:

  • Tax liability for TDS is determined at branch level. One of easiest way adopted by many depositors is to spread their investments across various branches so that the interest earned in a particular branch is below Rs10,000 in a financial year.
  • Tax liability is calculated on the first applicant’s name. Deposits held by minors are also subject to TDS. In this case the interest income will be clubbed under the income of the person in whose hands the minor’s income is included.
  • Investors often book fixed deposits in the name of non-earning family members such as spouse. The rule is that if the money is gifted to a non-earning member and the deposit is booked in his or her name, then the person has to submit a declaration saying his or her income is not taxable. However, when income tax is calculated, it will have to paid by the donor or earning member

TDS on fixed deposits is deducted at the following rates for the following category of account holders:

Type of Account Holders  TDS (%)
Resident Individuals, Sole Proprietorship, Trusts, Association of Persons,HUF  10.2%
Domestic Companies  20.4%
NRO Deposits  30.6%

Avoiding TDS

  • Distributing FD investment:Split the FD to separate banks or branches of banks in such a way that interest earned from any of the FD does not exceed the Rs 10000 limits.
  • Timing the FD: The TDS can also be saved by timing the FD in such a way that interest for any of the financial years does not exceed Rs 10000. For example, a 12-month FD of Rs 1 Lac @ 10.5% could be started in September as the financial year closes on 31st March so the interest would split in two financial years, and hence TDS could be avoided.
  • By Submitting Form 15G/15H

By Submitting Form 15G/15H

If you believe that your total interest income for the year will not fall within overall taxable limits, you should inform the Bank not to deduct TDS on deposits. You can do this by submitting a form as per the provisions of the Section 197A of Income Tax Act. Quoting from Section 197A

The Finance Act, 1982 has inserted a new section 197A with effect from June 1, 1982. The section enables an individual who is resident in India and whose estimated total income of the previous year is less than the minimum liable to income-tax to receive interest on securities, dividends and other interest without deduction of tax at source under sections 193, 194 and 194A of the Act on furnishing a declaration, in duplicate, in the prescribed form and verified in the prescribed manner. Rule 29C and Form Nos. 15F, 15G and 15H have been inserted in the Income-tax Rules, 1962 by the Income-tax (Fifth Amendment) Rules, 1982 prescribing the forms for the purposes of section 197A and laying down the procedure for furnishing the declaration form.

The forms required for different categories have been listed below:

 Category of Tax Payer Income Tax Section
Individual:Senior Citizen Sub-section (1C) of section 197A  15H (pdf)
Individual:Non senior Citizen Sub-sections (1) and (1A) of section 197A  15G(pdf)
Trusts/SocietiesAvailable from Assessing Officer  15AASample form(pdf)

Rule 29C of Income Tax Rules offers individual taxpayers the facility of furnishing Form 15G or 15H, as the case may be, requesting the payer of income not to deduct any tax. These forms have to be filed in duplicate and once the bank or the post office takes them on record, the entire interest is paid to the investor without any tax deduction. Important points that one needs to remember is

  • Fresh forms are required to be filed each year. As incomes of investors may differ from year to year, the eligibility for furnishing the forms has to be ascertained every year.
  • Secondly, for optimum benefit, these forms need to be furnished at the beginning of the fiscal such that the entire amount of interest escapes TDS. If the form is filed during the year, the tax already deducted cannot be adjusted against future tax deductions.

The main difference between Forms 15G and 15H is that Form 15G is meant for non-senior citizens whereas Form 15H is meant for senior citizens only.In order to be eligible to furnish Form 15G, the non-senior citizen investor needs to fulfill the following two conditions:

  1. The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil and
  2. The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab i.e maximum amount not chargeable to tax, which is Rs1,80,000 for men and Rs1,90,000 for women for.

If both these conditions are satisfied, Form 15G may be furnished to the bank or the post office and the entire interest income can be received without tax deduction.

Form 15H imposes just the first condition, in that, the final tax on the investor’s estimated total income computed as per the provisions of the Income Tax Act should be nil. The second condition imposed by Form 15G is not applicable in the case of Form 15H.

TDS and PAN Number

As per section 206AA introduced by Finance (No. 2) Act, 2009 wef 01.04.2010, every person who receives income on which TDS is deductible shall furnish his PAN, failing which TDS shall be deducted at the rate of 20%(as against 10% which is existing TDS rate) in case of Domestic deposits and 30.90% in case of NRO deposits

Please further Note that in the absence of PAN, as per CBDT circular no:03/11, TDS certificate will not be issued, form 15G/H and other exemption certificates will be invalid even if submitted and penal TDS will be applicable.

Ref:DNA:Start tax planning in the new financial year: Five things to do(Apr 2010), BCAJournal(Jun2010), Rediff

Interest and Income Tax

Interest earned on Fixed Deposits needs to be accounted for while filing your income tax returns for the year. Tax on interest of FD is as per the depositor’s income slab If TDS is deducted, it is at only at 10.2% for individuals for remaining part tax needs to be calculated. Interest income is under the head “Income from Other Sources” in the income tax return. TDS (if deducted) on the said interest income can be claimed by the individual in the income tax return.

Under the Act, an individual has an option to either offer income on cash (receipt) or mercantile (accrual) basis according to the method he regularly follows.

  • Where you follow accrual basis for disclosing your income you could claim credit of TDS in the same FY since both in case of interest on fixed deposit with Bank  tax would be deducted in the same year i.e. on accrual basis.
  • Where the interest income is offered to tax on receipt basis i.e. at the time of maturity, you should be eligible to claim credit of TDS only in the FY in which such interest income is offered to tax. However, in such a case you must ensure that correct disclosure is made in all the forms (Form 26A, Form 16A) and returns (personal income tax, e-TDS) with respect to the year in which tax was deposited and the credit of the same is claimed.

How to get TDS refund. If your tax liability is nil, but the bank has levied TDS on the interest earned on your fixed deposit then you can claim refund by filing your income tax return. Customers can take their TDS certificates (Form 16A) from banks and also check the amount deposited to the Income Tax Depart-ment based on their PAN number on the Income Tax website under Form 26AS. Based on the same, customers can apply to get the refund from the IT department.

Tax Saving Fixed Deposit

There is difference between Fixed Deposit and Tax Saving Fixed Deposit. In 2006 Indian government announced bank fixed deposits booked by an individual/HUF for 5 years and up to Rs. One Lac or Rs. 100,00/- will be eligible for exemption. This exemption would be under section 80C of the income tax act 1961. The interest rates on tax saving fixed deposits are generally calculated on a quarterly basis and the interest is reinvested into the fixed deposit. Ref:rupeetimes:Tax saver fixed deposits in India earn you more

Hope the post helped in understanding the taxation of Fixed Deposits.

 

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