Fixed Deposit Tax Benefits: What You Should Know

Fixed deposits (FDs) are one of the most popular investment options in India, primarily due to their safety and stable returns. FDs can also provide significant tax benefits, depending on how you choose to invest.

For anyone considering fixed deposits, understanding the tax implications is crucial. In this guide, we’ll walk through the key tax benefits associated with fixed deposits in India and how you can make the most of them.

Tax-Saving Fixed Deposits

A major fixed deposit tax benefit for investors comes from Tax-Saving Fixed Deposits (TSFDs). These are a special category of fixed deposits designed to provide deductions under Section 80C of the Income Tax Act, 1961. Here's how they work:

●     Deduction Limit

You can claim a deduction of up to ₹1.5 lakh per financial year by investing in these deposits.

●     Lock-In Period

These FDs have a mandatory lock-in period of 5 years, during which you cannot withdraw the funds.

●     Interest Rate

The interest on these deposits is similar to regular FDs, and many banks offer competitive rates on these products.

Important note: While the principal amount qualifies for tax deductions, the interest earned is still taxable.

Tax on Interest Earned

Interest income from fixed deposits is taxable. This is an important point to keep in mind because although FDs offer stable returns, the income earned will be added to your total income and taxed according to the income tax slab you fall under.

The tax treatment of interest income is as follows:

●     Interest Added To Total Income

Whatever you earn from your FD interest is added to your overall income for that financial year

●     Taxed As Per Your Slab Rate

This means the interest is subject to the same tax rate as your other income, whether that is 5%, 20%, or 30%, depending on your total earnings

For example, if your total income places you in the 20% tax bracket, the interest earned from your FD will also be taxed at 20%.

TDS on Fixed Deposits

Banks are required to deduct Tax Deducted at Source (TDS) on the interest earned from fixed deposits. The TDS rate and rules are as follows:

●     10% TDS

If your income from the FD interest exceeds ₹40,000 (₹50,000 for senior citizens), the bank will deduct a 10% TDS provided your PAN is submitted to the bank

●     20% TDS without PAN

If you do not provide your PAN, the bank will deduct TDS at 20%

●     Form 15G/15H

If your total income for the year is below the taxable threshold (₹2.5 lakh for individuals, ₹3 lakh for senior citizens, and ₹5 lakh for very senior citizens), you can submit Form 15G (for non-seniors) or Form 15H (for seniors) to avoid TDS

While TDS ensures that tax is collected at the source, it's important to note that it is not the final tax liability. If your total income tax liability is higher than the TDS deducted, you will need to pay the difference when filing your income tax return. Conversely, if you fall in a lower tax bracket, you can claim a refund.

Senior Citizens: Special Tax Benefits

Senior citizens, aged 60 and above, are eligible for certain special tax benefits on fixed deposits:

●     Higher exemption limit

Senior citizens can enjoy a higher TDS exemption limit on their FD interest income, which is ₹50,000, as opposed to ₹40,000 for others.

●     Section 80TTB deduction

Under Section 80TTB, senior citizens can claim a deduction of up to ₹50,000 per financial year on the interest earned from FDs, savings accounts, and other similar financial products.

This is an additional benefit for senior citizens, allowing them to reduce their taxable income by the interest earned.

Fixed Deposits and Section 80C

As mentioned earlier, Tax-Saving Fixed Deposits qualify for deductions under Section 80C. Here are a few additional points to consider:

• You can invest in these FDs through any bank or post office
• The investment is locked in for five years, and premature withdrawals or loans against these deposits are not allowed during this period
• Section 80C also includes other investment options like PPF, ELSS, and insurance premiums, so plan your investments wisely to take full advantage of the ₹1.5 lakh limit

Cumulative vs Non-Cumulative FDs: Tax Considerations

Fixed deposits offer two modes of interest payout, namely, Cumulative and Non-cumulative. The tax implications differ slightly for both options.

●     Cumulative FDs

The interest is compounded annually and paid out at the end of the deposit term. Since you don’t receive interest regularly, the tax liability arises only at the time of maturity.

However, the total interest earned is still added to your income for that financial year and taxed accordingly.

●     Non-cumulative FDs

In non-cumulative FDs, the interest is paid out periodically (monthly, quarterly, half-yearly, or annually). In this case, the interest you receive in each financial year is taxable, even if you reinvest it.

In both cases, the tax treatment remains the same: the interest is added to your overall income and taxed as per your applicable slab. However, with cumulative FDs, you may face a higher tax liability in the year of maturity.

How to Maximise Your Tax Benefits

There are a few strategies you can adopt to maximise your tax benefits on fixed deposit investments:

●     Opt For Joint Fixed Deposits

If you have a spouse or another family member in a lower tax bracket, consider opening a joint FD. This can help reduce the overall tax liability since the interest income can be split between both parties. You can open an FD online with your loved one and get this benefit.

●     Stagger Your Investments

Instead of investing a large sum in a single FD, consider splitting it across multiple deposits with different maturity periods. This can help spread out your tax liability over several years.

●     Use Section 80C Effectively

If you're eligible, make sure to invest in Tax-Saving Fixed Deposits to claim deductions under Section 80C. This will help you reduce your taxable income by up to ₹1.5 lakh each year.

●     Consider Senior Citizen Schemes

If you're over 60, take advantage of the higher TDS exemption limits and the Section 80TTB deduction to lower your tax liability.

Conclusion

Fixed deposits remain a reliable investment option, especially for those looking for safety and stable returns. However, understanding the tax implications is key to ensuring that you make the most of your investment.

By choosing Tax-Saving FDs, using Section 80C and 80TTB deductions, and planning your investments strategically, you can minimise the tax burden while still enjoying the benefits of a fixed deposit. You may consult with a tax advisor to ensure that your investments align with your financial goals and tax obligations.

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