Posted by The best way to invest money for risk-averse investors is Fixed Deposits (FDs) that offer safety, tax-savings and attractive interest rates. When it comes to the FD tax rate, there are many misconceptions in the minds of taxpayers. The first question you may ask whether FD interest is taxable or not?
High-Interest Fixed Deposit income is fully taxable as ‘income from other sources’ and tax deducted at source. The income from interest will also be added to your total income and you are liable to pay tax as per your income tax slab. For example, if after adding FD interest, your income tax slab is 30%, you are liable to pay interest on your entire income, including the FD interest. However, you can take advantage of tax exemption with Tax Saving FDs under section 80C, Income Tax. You can claim a deduction of up to Rs 1.5 lakh from your taxable income. Interest earned less than Rs. 40,000 is tax-free income (Rs. 50,000 in case of Sr. Citizens).
Seldomly, investors think about paying tax on the interest income on time. But it will help to avoid TDS. Here you will know how to avail income tax benefits on FD interest income.
1. Submit the Form 15G/H
If your total income comes under non-taxable bracket i.e Rs.2.5 lakhs, you can avoid TDS deduction by submitting a 15G/H form.
- Form 15G – individuals who are below 60 years.
- Form 15H – senior citizens.
Note: Submit these forms only if the tax on your estimated total income for the financial year is nil.
Company offers additional interest percentage to senior citizens and online FDs that will help you increase your earnings besides TDS claim. In addition to high interest earnings, Company also offers flexibility to choose the frequency of periodic interest payouts, loan against FD and multi-deposit facility.
2. File ITR
You can claim the TDS refund on FD interest by filing the ITR on time if your total income falls under the non-taxable bracket.
3. Tax-saving fixed deposits
You can invest in tax-free Fixed deposits of five-years but you will not be able to close or withdraw such fixed deposit accounts, not even for paying penalty. So, make sure you do not require such funds for five years at least. And, you cannot take a loan against tax-saving FDs.
4. Family Gifting
- To make this rule work for you, you need to give money to your non-working spouse as a gift and invest it in any tax-free FDs. Or you can invest in the name of your minor kids. Your spouse has to then reinvest that money. The income from the reinvested income will be added to the investor’s income i.e. spouse.
- If your parents do not earn a high income, invest in the name of your parents. You can give them money as a gift and invest in FDs. Unlike FDs in the name of spouse or a minor child, there is no clubbing provision of interest income in the case of parents.
5. Distribute your investment
You need to create different FD accounts to deposit your funds instead of depositing in one FD.
Let’s say you are investing to take a banking decision in various bank FDs. You need to open multiple FDs accounts to save taxes in such a way that the TDS on interest should not be more than Rs.40,000 for combined FDs in a particular bank branch.
You can diversify your funds in the following FDs:
- FD with Bank X
- FD with Bank Y
- and FD with Bank Z
Let us suppose FD interests from Bank X, Y and Z are Rs.25,000, Rs.20,000, Rs.15,000 respectively. Now, TDS deduction will not be applicable to the total interest from all FDs i.e. Rs.80,000 and TDS rate @ 7.5% will not cross the threshold of Rs 40,000 or Rs 50,000 (for senior citizens).
You can also consider Company FD which provides an interest rate of 6.85% to a senior citizen for 5 years and take advantage of the TDS threshold of Rs 5,000 per annum on interest. A Demat account is helpful along with a bank account in India. With such high interest rate, you can offset the effect of TDS deduction on your FD income.
Note: This is just the TDS treatment and not your tax liability in a financial year. The TDS will be adjusted accordingly but the tax on all FDs will be calculated as per your income tax slab.
Considerations
- It should be noted that the form 15G/H must be submitted at the starting of a financial year. Otherwise, the TDS cannot be refunded if it has been deducted by the fixed deposit issuer.
- Even if your FD issuer has deducted TDS, the interest earned income must be filed in your income tax return.