For many people, especially senior citizens, fixed deposits continue to be the most preferred investment option. It is the safest and easiest avenue to invest money. However, they have their own set of disadvantages in the form of low returns. Further, the interest income earned from FDs is not tax-free, bringing down the overall return percentage.

In this article, we will focus on how interest income is taxed and what are the income tax rules.

How Is Interest Income Taxed?

Interest income from FDs are fully taxable and get taxed at the rate slab you fall under. The interest income has to be shown under the head “Income from Other Sources” while filing the Income Tax return.

However, the bank deducts TDS at the rate of 10% from your interest income.

During the final income tax calculation, the TDS deducted on the interest income is adjusted against your final tax liability. In case your final tax liability is less than the TDS on interest income, the difference amount will get refunded to your bank account.

In case if more tax liabilities are arising out of interest income, then you need to pay it before the end of the financial year, as self-assessment tax.

Common Rules Related to Tax on Interest Income

  • If annual interest income is up to Rs. 40,000, then it is exempted from taxation, and for senior citizens, the amount goes up to Rs. 50,000.
  • Interest income exceeding Rs. 40,000 in a year is eligible for TDS at the rate of 10%, and the same goes up to Rs. 50,000 for senior citizens.
  • If you have not provided your PAN information to the bank, then they will charge a TDS of 20%.
  • TDS on interest from FDs can be avoided by submitting form 15G/15H to your bank at the start of the financial year.

How to Calculate Tax on Interest Income?

Calculating tax on your interest income is the most tricky part for depositors, and often gets complicated.

To calculate your actual tax incidence on yearly interest income, you can use an interest rate calculator in India, also known as FD calculator. Through this free online tool, you can calculate your interest income of a particular year.

Tax Saving Fixed Deposits

There are two types of fixed deposit, one is regular FD that has been discussed above and the other one is tax-saving FD.

The tax-saving FDs are similar to any regular FD with the only difference being its 5-year lock-in period. The tax-saving FD interest rates are the same that is offered in the regular FDs of a 5-year tenure.

The tax-saving FD interest rates are lower compared to FDs of the shorter-maturity period, due to the benefit of compounding. It gives out a higher yield, which also makes it a superior investment option.

The deposits made in the tax-saving FDs are eligible for tax deductions under section 80C. But, the interest income is fully taxable and is taxed as per your income tax slab rate.

Conclusion

Interest income from FDs doesn’t enjoy any special treatment under income tax rules and are taxed as normal income. But, through efficient management and awareness, one can lessen the impact of income tax through available means and enjoy higher yields.