Are Fixed Deposit Returns Taxable?

Quick Summary:

• Fixed deposits are safe and guaranteed return schemes that have a fixed tenure and fixed interest rate
• Only interest on a fixed deposit is taxable under the tax slab rate of the account holder. The principal amount is not subject to taxation
• 10% TDS on FD interest is also charged if the annual FD interest income exceeds ₹40,000 (₹50,000 for senior citizens)
• Tax-saver FDs (with a lock-in period of 5 years) let you claim tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act of 1961
• Senior citizens can claim tax deductions of up to ₹50,000 under Section 80TTB of the Income Tax Act of 1961.

For many Indian households, a fixed deposit comes as a safe and reliable option. It ensures guaranteed and stable returns are comforting for many. Some people open fixed deposits to park their excess savings, while others use them as retirement income. While FDs have been a forever favourite among all types of investors, what is often overlooked is that FDs are not tax-free. Yes, the interest accrued on FDs is taxable.

Fixed deposit income is taxable under ‘income from other sources’. That means it is considered a part of your income. Let's understand how interest on fixed deposits is taxable.

What is a Fixed Deposit (FD) and How Does It Work?

A fixed deposit is a financial instrument where a fixed amount is invested for a fixed tenure at a fixed interest rate. The interest rate for your scheme remains unchanged throughout the tenure, irrespective of market conditions.

Although you may withdraw funds from the FD before maturity, it may affect the returns and may also attract penalties. The annual interest accrued on the principal amount is taxable under the tax slab of the individual.

Generally, FDs offer compound interest, which means the interest is added back to the principal amount, and new interest is accrued on this new, larger amount.

Let's understand how FD taxation works with an example:

Ravi Malhotra, a 32-year-old businessman, opens a cumulative fixed deposit account with ₹5 lakhs. The tenure is 5 years, and the interest rate is 7.5%. Ravi falls in the 30% tax slab.

Crucially, tax on FD interest is payable on an accrual basis, meaning Ravi must report the interest earned each year in his tax return for that year, even if he only receives the money at maturity.

Here’s how the tax and TDS would be calculated correctly, year by year:

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Upon maturity after 5 years, Ravi will receive a total of ₹7,17,814. Out of this, ₹5,00,000 is his principal and ₹2,17,814 is his gross interest income, on which he would have already paid taxes annually.

Are FD Returns Taxable in India?

Yes, the government charges tax on interest earned from fixed deposits. The returns from an FD are declared under “Income from other sources” in your Income Tax Return (ITR).

The tax on FD income depends on the individual's age, income tax slab, chosen tax regime (old or new), and residential status. Additionally, TDS (Tax Deducted at Source) is deducted by the bank if the annual interest income from all FDs in that bank exceeds ₹40,000 (₹50,000 for senior citizens).

Continuing Ravi Malhotra's example, he must declare the interest income shown in the table above in his ITR for each of the five years and pay the corresponding tax. When filing his returns, he can claim credit for the TDS that the bank has already deducted.

How is TDS on FD Interest Calculated?

According to Section 194A of the Income Tax Act, 1961, banks must deduct TDS at a rate of 10% on FD interest. This is deducted annually if the interest accrued in that financial year crosses the threshold of ₹40,000 (or ₹50,000 for senior citizens).

If TDS is deducted, the amount will appear in your Form 26AS. You can claim this amount as a credit against your total tax liability when you file your income tax return.

TDS on Interest on Fixed Deposit – Eligibility and Limits

Here is a quick glance at the TDS limit on FD. Have a look for a better understanding:

• TDS limit on FD is 10%. This means 10% of the interest income is charged as TDS
• Excess TDS on FD interest is adjusted when you file income tax returns
• Individuals below 60 years of age are liable to pay 10% TDS when the annual FD interest exceeds ₹40,000, and the limit for senior citizens is ₹50,000.

Tip: You may open a tax-saver FD for better tax efficiency. Read about tax-saver FD in the following section!

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Taxable Interest on Fixed Deposit – What Are the Exemptions?

Though fixed deposit income is taxable, you are still eligible for certain tax exemptions and deductions under the Income Tax Act. Some of the exciting FD tax saving tips are:

Tax-Saver Fixed Deposits

You have the option of opening tax-saver FDs. These are special fixed deposits that allow you to claim a tax deduction of up to ₹1.5 lakhs under Section 80C of the Income Tax Act.

Note: This deduction is only available if you opt for the old tax regime. Tax-saver FDs have a mandatory lock-in period of 5 years and are only provided by banks.

Senior Citizen FD Tax Exemption

You must note that senior citizens with FD accounts can opt for tax benefits under the old tax regime. Under Section 80TTB of the Income Tax Act of 1961, you can opt for a senior citizen FD tax exemption under the old tax regime.

A maximum of ₹50,000 tax deduction can be claimed. However, this deduction must not exceed the total income earned.
Note: This deduction can only be claimed under the old tax regime.

How to File Income Tax Returns for FD Interest?

If you have a fixed deposit account, you must be aware of the income tax return requirements for FD interest. As interest earned on FD falls under the income of the individual, it has to be mentioned in the income tax return. So, the very first step is to carefully understand your tax liability based on your tax slab rate, age, and residential status.
Once you have calculated the total tax on FD interest, you must also mention the deductions you are eligible for. Depending on the details in the form, the income tax will be adjusted accordingly. In case excess TDS was deducted, the income tax department will refund the due amount.

Also, ensure you choose the correct income tax forms as per your tax slab rate. You may also consult a professional CA (Chartered Accountant) who can assist you with tax payments and income tax returns.

Note: Even if you have paid TDS, it is essential to mention the FD interest income details in the income tax returns.

Why is Mahindra Finance the Best Choice for Your Fixed Deposit Needs?

Mahindra Finance has been empowering Indians for years. When it comes to safe and secure finance management, Mahindra Finance is often highlighted as the leading choice. Whether you are planning for a short-term investment or a fixed tenure savings scheme, we can be your partner.

Fixed deposits are one of the financial tools at Mahindra Finance. We strive to offer the most competitive FD interest rates to help you gain maximum benefits. You also have the complete flexibility to choose a fixed deposit tenure according to your preferences. So, getting a personalised FD plan at Mahindra Finance is never a hassle. We ensure active customer-centric services to ensure you have the best experience. Connect with us today to know more about our FD plans.

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FAQs on Fixed Deposit Returns

Are FD returns fully taxable?

No. Only the interest income on a fixed deposit is taxable and not the initial principal amount.

What is the TDS rate on FD interest?

TDS on FD interest is charged at 10%. It is charged if the annual interest income crosses ₹40,000 (₹50,000 for senior citizens).

Can I avoid TDS on FD interest?

TDS on FD interest is only charged if it crosses ₹40,000 (₹50,000 for senior citizens) across all the accounts in a bank. So, you may only avoid TDS if the interest income on the FD does not cross this limit.

How can I reduce tax on FD interest income?

You may open a tax-saver FD account that has a lock-in period of 5 years. It lets you claim tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act of 1961. Senior citizens may also claim tax deductions of up to ₹50,000 on senior citizen FD accounts.

Is TDS deducted on the principal amount or only interest?

TDS(tax deducted at source) is only charged on the interest accrued and not on the principal amount of your fixed deposit.

Are there any exemptions on the FD interest tax for senior citizens?

Yes. Senior citizens can claim tax deductions of up to ₹50,000 under Section 80TTB of the Income Tax Act of 1961.

How is tax calculated if the FD is in the name of a minor child?

An FD account in the name of a minor child is also taxable. The interest income is clubbed with that of the parents' income and taxes as per their tax slab rate until the child becomes an adult.