If you aim to earn at a high rate with the safety of deposits, then investing in bank fixed deposits is an ideal option. Bank FDs can offer as high as 6.65% interest rate, irrespective of the market conditions. Like other investments, the FD returns attract taxes also. Let us understand first how your FDs are taxed.
FD interest earned is included in your total income. The amount invested in the FD is exempt from taxes under 80C of the Income Tax Act, but interest income is taxable as per the investor’s tax slab. Also, under section 194A, Income Tax Act, 1961, you need to pay tax deduction at source (TDS) @10% if your total earned interest is more than Rs. 40,000 in a year (Rs.50,000 for senior citizens under Section 80 TTB).
FD interest income is taxable on an accrual basis. If you have a cumulative FD for three years, you will receive interest at the end of three years, and the depositor is liable to pay tax on the accrued interest every financial year.
If the interest earned on a fixed deposit exceeds Rs.40,000 in a financial year, it will attract a 10% TDS. For example, if the interest income is Rs.40,000 in a financial year, the bank would deduct Rs.4,000 as TDS and pay only Rs.36,000 as the interest income exceeds the limit of Rs.40,000.
Let us explain the ways to save tax on FD interest.
Submit Form 15G/15H
The depositor can submit Form 15G/ 15H to save TDS on interest. Senior Citizens can submit 15G, and all other individuals can submit 15H. If your income does not come under any income tax slab, you can submit Form 15G/H. It is necessary to submit the form at the beginning of the year. So, your bank will not deduct TDS on the FD interest. If you forget to submit it, you must file an ITR to claim a refund of TDS.
Laddering and Distributions of FDs
You can split your funds into different fixed deposits with different lenders. You can split the FDs in such a way that the interest earned on any of these FDs is not above the limit of Rs.40,000 for non-senior citizens and Rs.50,000 for senior citizens.
Also, you can invest in a fixed deposit in your name and another one in the name of the HUF account. Both accounts will be two separate heads, and the interest earned will be split into two names. You can open FD accounts in the name of your family members.
Choose Different FD Tenures
You need to open FDs with different tenures that can divide your FDs into two financial years. You should ensure that the interest does not exceed Rs.40,000 in a financial year. For example, if you invest in a one-year fixed deposit, you can start it in September. The financial year ends on March 31 every year. The interest will be divided into two financial years, and you can avoid TDS.
Thus, fixed deposits are an all-time favourite instrument to earn handsome returns. TDS savings make FD investments more attractive. Depositors can use the fixed deposit interest rate calculator to know the interest income beforehand and plan their investments.
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