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Monday, October 01, 2012

Are you paying TAX on your FD interest

As you approach Financial Freedom, you would realize that the world of money brings its own challenges. Someone once asked me : "There are 2 different sets of money problems in the world - One set of problems come with having no money and the other set of problems come with having a lot of money. Which one do you prefer?"

Why get bothered about FD interest?
Most of us who are still stuck in our rat race may have never realized that we are earning interest through various bank Fixed Deposits and even if we are earning a single rupee of interest, we are liable to include that as our taxable income and pay tax on the same. This might not seem to be a big issue while we are in this mindless race because the amount of interest is not significantly high and you may feel that your bank is anyway deducting tax at source (TDS), but once you start dealing with millions of rupees of interest, you got to take a re-look at your entire approach.

What are Fixed Deposits?
Fixed Deposits (FDs) are one of the most popular and traditional debt instruments. They are much more popular than other debt saving instruments like Provident Fund, Post Office Deposits etc because of the high interest rate and liquidity that these deposits offer. But so often, we fail to realize the tax implications of the interest earned through such deposits. Whether you are financially free or not, it pays to understand the tax implications arising out of Fixed Deposits.

Rules governing taxation on FD interest
I would try to keep these tax rules as simple bullets so that it is easy to understand and follow. so, here we go...

1. Every rupee that you earn through Fixed Deposits is taxable. Yes, every single rupee. Do not get confused if you have heard something like an interest limit of INR 10,000. This limit is not applicable on FDs / RDs.
2. The income through FD interest is added to your total income under the header "Income from other sources" and then taxed as per the income slab you are in, for that specific financial year.

3. The interest income from fixed deposits are taxed on "accrual basis" and not when actually received. This means that the tax on interest income earned at the end of financial year have to be paid even if the interest is credited at a later year. For e.g. if you are investing Rs 75000 in a  fixed deposit for five years, you will have to pay tax on liable interest for all financial years it spans, even though the interest will be credited at the end of fifth year.

4. Tax Deducted at Source (TDS) is deducted by the banks on your Fixed deposit interests if the interest amount exceeds INR 10000 from one or through multiple investments put together.

5. If you think that your total income does not fall under the tax bracket, then you need to submit Form 15G (non senior citizens) and Form 15H (for senior citizens) which instructs the bank not to deduct any tax at source.

6. These forms (Form 15G and Form 15H) have to be submitted every year to avoid TDS, if applicable. The need for repeated submission of these forms arises from the fact that your tax bracket may have changed from one year to another. 

7. Even Fixed Deposits in name of the minor attract TDS, if the interest exceeds the limit of INR 10,000.

8. The TDS deducted by the bank would be at a fixed rate of 10% (if you have your PAN no. registered with the bank) or at 20% (if your PAN Number is not registered). At the end of the financial year, bank will also issue you a tax certificate mentioning the tax it has deducted at source(Form 16A).
9. If you fall in a different tax bracket - lets say 20% or 30%, you would have to incorporate the balance payable tax as a part of your income tax returns (ITR) that you are filing for the financial year in which you earned the interest.

10. The NRI's, who earn interest on their NRO's account, are subject to 30% TDS

11. Since TDS threshold of INR 10,000 interest is calculated at the branch level, you can avoid TDS by splitting your FDs across multiple bank branches OR by submitting Form 15G/15H OR by opening a FD in someone else's name, but all these techniques are just delaying the inevitable. 

You are liable to pay your tax on every single rupee you earned as interest on FD during the year. In all such cases, you will have to pay tax and show the same at the time of filing your income tax return.

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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.


Manoj Arora
elevate your life...

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1 comment:

  1. Hi Manoj,

    Excellent article.
    One correction, regarding statement "8. Interest accrued through "savings account" is NOT taxable."

    All interest accrued on savings account use to be taxable till FY11-12. From FY12-13 onwards under Sec 80TTA up to Rs10000 per year on interest from all savings accounts put together is non taxable.

    Kindly verify at your end and rectify.