Understanding Taxation on Fixed Deposits: Key Things You Should Know

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Fixed Deposits are a safe and secure way of growing your investment. They help you earn on the money you deposit through the interest earned on the same. However, the government can take a part of this extra money as tax. It is an established law in the country, governed under the Income Tax Act. If you’re considering investing in an FD, you must know how taxes work with your FD earnings. This will help plan your finances wisely and make efficient decisions. In this article, we will cover everything you should know about taxation rules for Fixed Deposits.


TDS, which stands for Tax Deducted at Source, is when the bank or financial institution takes a small part of the money you make from interest before giving it to you. They send this deducted money to the government as a Tax on Fixed Deposit. The rate at which they take this TDS can vary. It depends on how much interest you get and your overall income. This way, the government gets its tax share directly from your interest.


Let us understand how interest is taxed so you can manage your taxes wisely and avoid surprises during tax season.

  1. Adding Interest to Your Income: Every year, you need to add the interest you earn from your FD(s) to your overall income, when you fill out your Income Tax Return. It goes under ‘Income from other sources’ in the form.

  1. Finding Your Tax Rate: Check which tax group you belong to based on how much you earn. Your tax rate will depend on this group.

  1. Adjusting TDS: If the bank already took some tax money (TDS) from your interest, the tax department will count this against your total tax amount.

  1. Paying Tax on Undeducted Interest: If the bank did not take any tax from your interest, you still have to add that money to your total income. You will have to pay tax on it.

  1. Don’t Wait Till Maturity: It is not a good idea to wait until your FD matures and you actually get the interest. Adding all the interest at once could push you into a higher tax group, making you pay more tax. You can see the TDS details on Form 26AS for any income you have.



Let us understand how to calculate and pay tax on your interest income so that you can play a role of responsible tax payer:

  1. Paying Tax by March 31st: When you add the interest to your total income and find out you need to pay tax, make sure to do it before March 31st of that year, even though this deadline is extended. This way, you can settle any tax you owe.

  1. Advance Tax for Higher Amounts: If the tax you have to pay after adding your interest to your total income is more than Rs. 10,000, you have to pay Advance Tax. It means you need to pay some tax in smaller amounts throughout the year.

  1. Splitting Payment into Instalments: For Advance Tax, you need to follow the rule of paying it in parts, like installments. It helps you manage your taxes better and not feel the burden all at once.

  1. Keeping Up with Quarterly Payments: To follow the Advance Tax rule, ensure you pay your taxes in smaller portions every few months. This way, you stay in line with the rules and avoid any issues.

  1. Staying Tax-Smart: Understanding how to calculate and pay tax on your interest income keeps you on the right side of the tax rules. By making payments on time, you can stay organized and avoid any last-minute tax rush.


When and How Taxes Are Deducted From Your Interest Income In Relation To Fixed Deposit as per taxation rules?

Let us understand when and how taxes are deducted from your interest income in relation to Fixed Deposits.

When the Bank Does Not Deduct TDS 

Question: What happens if the bank does not take away any tax?

Answer: If the money you get from interest on all your FDs in a year is less than Rs 40,000 (or Rs 50,000 for seniors), the bank will not deduct any tax. Before 2019, this limit was Rs. 10,000.

When the Bank Takes 10% TDS 

Question: When does the bank take 10% tax from your interest money?

Answer: If the total interest income from all your FDs with the bank is more than Rs 40,000 (or Rs 50,000 for seniors), the bank will cut 10% as tax. Before Budget 2019, the limit was Rs. 10,000.

When the Bank Takes 20% TDS

Question: When does the bank take 20% tax from your interest?

Answer: If you do not give your PAN details to the bank, they will cut 20% as tax. So, make sure the bank knows your PAN.


How to Prevent TDS Deduction

Question: How can you stop the bank from cutting tax?

Answer: If your total income does not need tax, you can give Form 15G or 15H to the bank before the due date. Do this at the start of the year to avoid extra tax and needing refunds later.


Being aware about tax on fixed deposits is super important. Your taxes affect your finances: understanding rules, limits, and deductions will help you make smarter choices. Handling taxes wisely will also enable you to get the most from your fixed deposits.

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