Tax saving is an essential part of financial planning, and there are many investment options to assist with this. If you are looking for a low-risk investment option for your portfolio, consider fixed deposits (FDs). They are low-risk investments that offer assured and stable returns. Fixed deposits are suitable for various term goals and help reduce the overall risk of your portfolio. However, like any other investment, FDs are also subject to certain tax rules that can impact your final returns. Understanding these tax rules can help you decide if FDs are the right choice for you and help you avoid unexpected tax liabilities.
Income Tax on Interest
The interest earned from fixed deposits is classified as “Income from Other Sources.” This income is added to your total taxable income and taxed based on your applicable tax slab. For example, if you are in the 20% tax slab and earn Rs 55,000 as interest from an FD, this amount will be added to your taxable income, and you will have to pay 20% tax on it.
Tax Deducted at Source (TDS)
If your interest income from an FD exceeds Rs 40,000 in a financial year, banks or financial institutions deduct tax at source (TDS) on the interest. For senior citizens, the limit is higher at Rs 50,000. If you provide your PAN number to the bank, the TDS rate is usually 10%. However, if your total taxable income is below the taxable limit, you can avoid TDS deductions. To do this, individuals below 60 years of age must submit Form 15G, while senior citizens must submit Form 15H.
Tax on Premature Withdrawal
Premature withdrawal from FDs usually comes with a penalty, and the interest earned is taxed as per your income tax slab. The penalty for premature withdrawal reduces your total interest income, but this penalty is not tax-deductible.
Tax on Interest from Tax-Saving FDs
Tax-saving FDs qualify for tax exemption under Section 80C of the Income Tax Act, of 1961. Investments of up to Rs 1.5 lakh in these FDs can be claimed as deductions, reducing your taxable income. However, the interest earned from these FDs is taxable, and if it exceeds Rs 40,000 in a financial year, TDS will also apply. It’s important to understand the tax implications of FDs before investing. If you plan to open an FD, make sure to compare the interest rates offered by leading private banks.
Banks and Fixed Deposit Interest Rates (1-2 Year Term)
- RBL Bank: 8.10%
- Bandhan Bank: 8.05%
- DCB Bank: 8.05%
- IndusInd Bank: 7.99%
- Yes Bank: 7.75%
- TNSC Bank: 7.75%
- IDFC First Bank: 7.75%
- Catholic Syrian Bank: 7.75%
- Tamilnad Mercantile Bank: 7.50%
- Karur Vysya Bank: 7.50%
Disclaimer: Times Bull is not responsible for any financial investments made, as all decisions are solely your responsibility. If you plan to invest, please consult a financial expert.