Fixed Deposit Interest Income: All About Paying Tax on it

Fixed deposits or FDs are India's most popular savings tool. A significant part of a household's savings is locked up in fixed deposits. Investment security and ease of withdrawal draw in a lot of people to park their money in FDs. However, many individuals are not sure about how to pay tax on this interest.

Here are a few things to know:

1) Interest income is fully taxable

Interest income earned from fixed deposits is fully taxable. It is included under the head 'income from other sources' in your income tax return. It forms a part of your total income and tax has to be paid on it based on the slab rates applicable to you.

2) TDS (tax deducted at source) on interest income

A bank aggregates your total interest income from fixed deposits held at all its branches. If this total income exceeds Rs 10,000, it shall deduct TDS. Banks follow accrual method of TDS deduction. This means it deducts TDS every year (or quarterly) on interest due to you, and not when the deposit matures and interest is paid to you. Let's say you have a fixed deposit for a period of 3 years, the bank will deduct TDS every year even though interest for that year is not paid or credited to your account.

3) Paying tax on interest income

Add the interest earned for the year to your total income in your tax return - even though it may not be paid out. Calculate your tax liability on such total income. TDS, which has been deducted by the bank, is adjusted against your final tax liability. This way, the timing of your income inclusion and taxes paid on it match with the TDS deduction at the bank's end.

Even when no TDS is deducted, include the interest income in your total income and pay tax on it. Suppose you wait until the maturity of your FD when interest is actually credited to your account, you may miss out on the TDS credit over the years. The Income Tax Department allows TDS to be adjusted against tax payable where corresponding income has been reported. If you do not report the interest income you earn each year, you may not be able to take credit of TDS deducted against it. Also, a high interest income if only reported in the return when it is received may push you up a slab and you may end up paying higher tax on it.

Most banks issue a Form 16A for TDS deducted by them. You can also cross check TDS details with your Form 26AS.

Let's take an example to understand how to pay tax on the interest earned:

Ajay falls in the 20 per cent tax slab. He has with a bank two FDs of Rs 1,00,000 each for a period of 4 years at 8 per cent interest per annum. In the first year, his interest income is Rs 8,000 from each of the FDs. Total interest accrued is Rs 16,000 in the first year. Bank deducts TDS at 10 per cent of Rs 800 on both the FDs.

Total interest income of Ajay = Rs 16,000

Total TDS deducted = Rs 1,600

Total tax payable by Ajay based on his slab rate = Rs 3,200.

Therefore, the balance tax payable by Ajay is Rs 1,600.

4) When to pay tax on interest income

Your tax dues must be paid by 31st March of the financial year, to avoid any interest levy. However, if you have a large amount of interest income, advance tax may be applicable to you and you will have to estimate your quarterly tax dues and pay them as per advance tax timelines. If you have any tax dues for financial year 2014-15, which arise due to inclusion of interest income, pay them at the earliest.

Starting June 1, 2015, TDS is also applicable on interest income from recurring deposits. Therefore, tax treatment mentioned above shall be applicable for both these types of interest income earned.

Disclaimer: All information in this article has been provided by Cleartax.in and NDTV Profit is not responsible for the accuracy and completeness of the same.