Fixed deposits also known as term deposits are one of the most popular investment instruments in India owing to a number of benefits which they offer. Besides providing for safety of capital and assured returns, fixed deposits also qualify for a tax deduction under Section 80C of the Income Tax Act.
Thus, it is both necessary and wise to know the below-mentioned 5 rules regarding fixed deposits.
1. Tax Treatment of FD Interest: Interest earned on fixed deposits is fully taxable. It is taxed as per the slab rate applicable to your total taxable income along with applicable surcharge/cess. For instance, if your taxable income for FY 2019-2020 is Rs. 10 lakhs, then the amount earned by you as interest on your fixed deposit will be taxed at 20% (income tax slab rate for taxable income Rs. 10 lakh).
2. TDS on Fixed Deposits: The levy on FD interest is a Tax Deducted at Source (TDS) and is paid by the bank on your behalf at the time the interest is credited to your account and not at the time of maturity of the term deposit.
If the amount of FD interest exceeds Rs. 10,000 (this limit has been proposed to be hiked to Rs. 40,000 in the Interim Budget 2019) in a financial year, the TDS is deducted by the bank at the rate of 10% if PAN (Permanent Account Number) is provided, otherwise at the rate of 20%.
Thus, if there is any deficit/surplus TDS paid by the bank on your FD interest, the difference is payable/receivable by you.
No TDS is applicable on Post Office Term Deposits (POTD) thus, individuals need to declare interest earned on post office fixed deposits while filing their income tax return.
3. Tax Exemption for Senior Citizens: No TDS is applicable on the FD interest of Senior Citizens (individuals aged 60 years or more) if the interest amount does not exceed Rs 50,000 in a financial year.
4. Tax Benefit: Only fixed deposits made for a fixed period of 5 years qualify for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Premature withdrawals of tax-saving fixed deposits may attract penalty charges.
5. Additional Tax Benefit for Senior Citizens: According to Section 80TTB, senior citizens are eligible to claim a deduction of up to Rs. 50,000 on the interest income earned from fixed deposits.