Fixed Deposit: TDS, Tax Deduction, Tax on Accrued Interest

Fixed Deposit Income Tax Deduction (A.Y.2022-23): Every year we plan our tax as per the income tax slab and deductions of that particular assessment year. But we always have some confusion, about which investment is good to get a deduction under section 80C. Here, we’ll talk about one of the most popular investments about fixed deposits come under section 80C. You can get the complete detail like maturity period, interest, pre & post-tax return and overall overview.

The concept is very simple and clear invest in a “Fixed Deposit” for five years and gets a deduction from Gross Total Income up to Rs.1,50,000 (AY.2022-23) along with PPF/LIC/NSC/ULIP. Any individual/HUF can open an account of Fixed Deposit in any scheduled bank, in his own or Karta’s name single or jointly with another adult/minor individual (joint holder type) on either or survivor basis.

Updates: The budget 2021 proposes exempting senior citizens from filing income tax returns if pension and interest income are their sole sources of income. In the 2021 Budget, Section 194P was enacted to require banks to deduct taxes from pension and interest income in seniors over 75 years old.

Who can invest in FD?

Persons eligible for Fixed Deposit Income Tax Deduction: The individual and HUFs are eligible for fixed deposit deduction under section 80C.

• Any individual or a Hindu undivided family may invest in bank term deposits with a scheduled bank, in his own/Karta’s name (single holder type) or jointly with another adult/minor individual (joint holder type) on either or survivor basis.
• The scheme is also known as Tax Saving Fixed deposit for 5 years.

How to apply Fixed Deposit?

Application Procedure for Fixed Deposit: It is a very simple procedure to open a Fixed deposit in any bank. Nowadays you can open a fixed deposit online with only a few clicks. There are lots of banks that offer fixed deposit online like ICICI Bank, HDFC Bank. A five-year fixed deposit is only eligible for tax deduction under section 80C of the Income Tax Act, so be aware of that.  Therefore, you should open a fixed deposit for a period of at least five years, not shorter than five years to get the benefit of income tax deduction.

• The investor should apply to the bank, in the prescribed form for Bank Term Deposit Scheme.

Amount of FD Income Tax Deduction 

Maximum Amount of Deduction for Fixed Deposit:  Combined with other investments under section 80C, the taxpayer will only be able to deduct up to Rs.1,50,000/-. 

• The investment shall be made for a minimum sum of Rs. 100 or in multiples thereof subject to a maximum of [1,50,000], during a financial year.

Nomination

• The facility of nomination is available on all bank term deposits, except those made/held by or on behalf of a minor.
• Particulars of the nominee may be furnished at the time of application or at any time thereafter before maturity.

Interest Rate of Fixed Deposits

• The rate of interest on the bank term deposit scheme shall be fixed by the bank concerned from time to time, and shall be payable monthly/quarterly, or in a lump sum on maturity. You can check the official website of the bank for the latest update of Fixed Deposit interest. Check the Latest Fixed Deposit Rate of ICICI Bank Here

Issue of Deposit Receipt

• The bank shall issue a deposit receipt bearing name, address, PAN and signature of the assessee alongwith other specified particulars.
• In case interest is payable on maturity, the yearly rate of interest shall also be specified on the receipt.

Maturity Period

• The fixed deposit shall mature on expiry of five years from the date of receipt to get Fixed Deposit income tax deduction under section 80C.

Premature encashment

• The premature encashment is not permitted under the bank term deposit scheme/fixed deposit.
• However, in the event of the death of the first holder, the other joint holder may encash the deposit before its maturity, by applying to the branch manager along with proof of death of the first holder.

Transferability

• A term deposit/fixed deposit may be transferred from one branch to another of the concerned bank, on an application by the investor.
• Transfer of deposit from one bank to another shall not be permitted.

Income Tax Benefits of Bank Term Deposit Scheme (FD)

• The amount of Rs. 1,50,000 is allowable as a deduction under section 80C along with LIC/NSC/PPF/ULIP.
• The benefit is available to the first holder if having joint name on Bank term deposit scheme account.
• Check: Total Deduction Allowed u/s 80C, 80CCC and 80CCD

Tax on FD Interest Income

• You need to add interest to your total income even though interest income may not be paid out, include it in your income tax return each year.
• Mention fixed deposit interest income under the head of ‘Income from other sources’ in ITR for A.Y.2022-23.
• You can reduce the tax liability of TDS deducted on fixed deposits by banks.
• You can check the form 26AS to verify the TDS detail deducted on your fixed deposit interest.

As you know the interest on FD will be taxable so you have to know the post-tax return on Fixed Deposit. If you are getting interested on FD is 8% and you come under the highest tax bracket i.e. 30.9% then the actual post-tax return is 5.528%.

In India, we’ll talk about post-tax returns. So you must consider this aspect also while investing in a fixed deposit to get a deduction under section 80C.

TDS on Fixed Deposits

In case the interest income on the F.D is more than Rs. 40,000 per year Rs. 50,000 (Senior Citizen aged 60 years or above) then the bank has to deduct TDS on interest income @ 10% if the individual submits PAN to the bank.

A Limit of Rs. 10,000 is to be checked per bank per individual. So there may be a case that an individual may receive interest from FD of more than Rs. 10,000 but from different banks then in that situation, no TDS would be deducted.

In case the individual fails to submit PAN to the bank, TDS @ 20% would be deducted on the interest income of more than Rs. 10,000.

Example: A earns Rs. 45,000 as interest from bank FD. If A submit PAN to the bank then Rs.1,500 would be deducted as TDS but in a case A fails to submit PAN then Rs.3,000 would be deducted as TDS.

Is it Possible to Avoid TDS on FD Interest?

There are some cases where even the interest income is more than Rs. 40,000 and there will be no deduction of TDS by the bank.  However, their Total Income (including interest income) is below the minimum exempt income (Rs 2.5 lakh for FY 2019-20). In these cases, the taxpayer has to submit Form 15H and 15G as introduced by the government. As per the provisions of income tax law, if an individual submits Form 15G/ 15H to the bank declaring the NIL or lower deduction of TDS, the TDS in those cases will be deducted at the lower rate as specified.

Note: The validity of these forms is 1 year i.e. every year an individual has to submit the form again.

Check here detailed article on how to avoid TDS on FD interest

Refund of TDS on FD

If the net tax liability of an individual is NIL but there has been a deduction of TDS by the bank on the interest income, then an individual can claim the refund of the TDS deducted by filing ITR. TDS certificates i.e. FORM 16A can be taken from the bank and also can check the TDS deducted in Form 26AS which is available on the Income tax website.