TDS on FD Interest: How Much TDS is Deducted on Fixed Deposit?

TDS on FD Interest: How Much TDS is Deducted on Fixed Deposit?

“TDS on FD interest is currently 10% if your annual interest income from fixed deposits exceeds Rs. 40,000 (Rs. 50,000 for senior citizens). However, this rate jumps to 20% if you haven’t submitted your PAN to the bank.”

Tax Deducted at Source (TDS) is a crucial mechanism for tax collection in India, ensuring that tax is collected at the source of income rather than at the end of the financial year. This system applies to various types of payments, including Fixed Deposit (FD) interest, salary, commission, rent, and professional fees. By deducting a certain percentage of these payments before they are disbursed, TDS helps maintain a steady flow of tax revenue and minimises the risk of tax evasion. Using this article, understand how TDS is applied to FD interest, including the current rates, exemption limits, and the calculation process.

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What is Tax Deducted at Source (TDS)?

Tax Deducted at Source (TDS) is a means of collecting income tax in India, where a certain percentage of payments such as FD interest, salary, commission, rent, and professional fees are deducted at the source by the payer before the payment is made to the recipient. The deducted amount is then remitted to the government on behalf of the recipient. This system helps ensure a steady collection of taxes and reduces tax evasion by bringing more transactions into the tax net. The payment recipient can claim a credit for the amount deducted from their income tax return, effectively reducing their overall tax liability.

What is TDS on Fixed Deposit?

Tax Deducted at Source (TDS) on Fixed Deposit (FD) interest is a mechanism by which the bank or financial institution deducts tax when crediting the interest to the depositor’s account. According to the Income Tax Act, the bank must deduct TDS at the prescribed rate if the interest earned on FDs exceeds a specified threshold in a financial year. This is covered under the TDS on FD interest section of the Act. Depositors who do not fall under the taxable income bracket can avoid this deduction by submitting the appropriate forms to the bank. Investors must know the TDS on FD interest section to ensure proper tax compliance and financial planning.

Current TDS Rate on FD Interest

TDS rates on FD interest are fixed by the Income Tax Department, officially. In the following table, we have given the current TDS rate on FD interest,

What is the FD interest TDS Exemption limit?

The FD interest TDS exemption limit is Rs. 40,000 for individuals and Rs. 50,000 for senior citizens. This means no TDS is deducted if your annual FD interest falls within these limits. 

How the TDS on Fixed Deposit is Calculated?

Income tax on interest on Fixed Deposits is fully taxable and forms part of your total income under the heading ‘Income From Other Sources.’ This income is taxed according to the applicable income tax slabs. When the financial institution credits the interest on the Fixed Deposit, the TDS amount is deducted automatically.

Here is an illustration showing how TDS on FD interest is calculated:

Case 1: Mr. Sharma deposits ₹6 lakh as a Fixed Deposit with a bank at a rate of interest of 6% per annum. He will earn ₹36,000 as interest per year. Since this amount is within the exemption limit of TDS on FD interest for individuals (₹40,000), no TDS will be deducted.

Case 2: Mr. Sharma deposits ₹12 lakh as a Fixed Deposit with a bank at a rate of interest of 6% per annum. He earns ₹72,000 as interest income per year. Since this amount exceeds the exemption limit, TDS will be deducted at 10%. Therefore, the TDS on FD interest is ₹7,200 (10% of ₹72,000).

If Mr. Sharma has not submitted his PAN details to the bank, TDS on interest on Fixed Deposits is deducted at the higher rate of 20%. In this case, a TDS of ₹14,400 (20% of ₹72,000) will be deducted.

Take a look at our FD Interest Calculator 

In the following section, we’ll talk about Form 15G and Form 15H, which help you to request a TDS exemption.

What are Form 15G and 15H?

Here are the brief definitions, purpose and difference between form 15G and 15H,

Form 15G

Form 15G is a self-declaration form submitted by individuals below 60 to request exemption from Tax Deducted at Source (TDS) on their income. This form is primarily used when the individual’s total income is below the taxable limit, ensuring that no TDS is deducted on interest earned from Fixed Deposits, recurring deposits, or other income sources. By submitting Form 15G to their bank or financial institution, individuals can avoid premature tax deductions on their earnings, simplifying their financial management and ensuring that they only pay taxes if their income exceeds the exemption limit. Eligible individuals must fill out and submit Form 15G at the beginning of each financial year to avoid TDS on their income.

Here is the Form 15G below,

Form 15H

Form 15H is a self-declaration form submitted by senior citizens (individuals aged 60 years or above) to request exemption from Tax Deducted at Source (TDS) on their income. This form is used when the total income of the senior citizen is below the taxable limit, ensuring that no TDS is deducted on interest earned from Fixed Deposits, recurring deposits, or other income sources. By submitting Form 15H to their bank or financial institution, senior citizens can avoid premature tax deductions, simplifying their financial management and ensuring they only pay taxes if their income exceeds the exemption limit. Eligible senior citizens must complete and submit Form 15H at the beginning of each financial year to prevent TDS on their income.

Here is the Form 15H below, 

Does Bank Deduct TDS on FD interest?

Yes, banks deduct TDS on FD interest. As we mentioned, the amount of TDS depends on your annual interest income and PAN status.

Conclusion

In conclusion, TDS Income tax on interest on Fixed Deposit is a significant aspect of income tax management that affects how interest income is taxed and reported. With established exemption limits and specific TDS rates, depositors need to know their eligibility for exemptions and the correct forms to submit. Understanding TDS calculations and ensuring timely submission of forms like 15G and 15H can help individuals manage their tax liabilities effectively. 

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