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How to Pay Income Tax on Fixed Deposit Interest Rate

Introduction:

Fixed deposits are a traditional means to ensure returns from your savings through the interest generated from them. They are widely considered one of the safest investment options that help investors accumulate money over varying periods. While the interest earned on fixed deposits can help meet your goals in a planned manner, interest under the income tax laws is counted as income and hence fully taxable. Let’s access how and when you can best pay your income tax on fixed deposit interest to avoid paying more tax than you have to.

What is a Fixed Deposit?

A Fixed Deposit is a safe investment choice to grow your savings. You deposit a pre-decided lump amount with your bank or any other financier, choosing a consensual tenure for the maturity of the deposited amount. According to the interest rate you locked in your lump sum, the deposit amount will start accumulating the interest and grow over the chosen period. The interest rate, being pre-decided, remains unaffected by market fluctuations. It means it’s an assured return which you can withdraw right at the end of it, or partially or even fully before maturity.

What is a Corporate Fixed Deposit?

While investors often choose to turn a portion of their savings into a fixed deposit bank, corporate fixed deposits are also popular avenues to ensure the growth of your savings. Here, corporates or non-banking financial institutions accept deposits from investors for fixed interest rates and periods.

Why may you choose to invest in a Corporate Fixed Deposit?

  • Higher interest rates, 0.25% extra for Senior Citizens
  • Flexibility in tenure and interest payment rates
  • Unaffected by market fluctuations
  • More safety and lower risk with high-ranking corporates
  • Availability of loans against corporate fixed deposits

Taxation on fixed deposit interest rate

Since interest accumulated through your fixed deposit is counted as income, you are bound by the income tax laws to pay taxes for the same under ‘income from other sources.

  • Your income tax slab:

    The income from fixed deposit interest adds to your total income in a given assessment year, determining your income tax slab. Since bank fixed deposits are common among senior citizens, the income tax laws allow them a flat deduction of Rs 50,000 per year, given their total annual income does not exceed the minimum taxable income, that is, Rs. 2,50,000.
  • When to pay the tax:

    It is advisable to pay the tax from fixed deposit interest income by the end of every financial year. To wait until the maturity of the fixed deposit for the payment of taxes accumulated over the tenure may mean being pushed to a higher income slab. The individual may end up paying more taxes than they needed to.
  • TDS on the Interest from Fixed Deposits:

    Tax Deducted at Source or TDS is an apparatus by which a payer, in this case, the bank or the corporate, deducts 10% while paying you the interest income. However, the financier deducts this TDS only when your income from fixed deposit interest exceeds Rs. 40,000 annually (Rs. 50,000 in case of senior citizens).
  • Alternative scenario:

    If the annual income from fixed deposit interest exceeds Rs. 40,000 or Rs 50,000, the bank or the corporate cannot deduct TDS if it is below the taxable threshold.  

Additional read: How much tax is deducted on fixed deposit?

Tax Benefits on Fixed Deposit

  • Under section 80C of the Income Tax Act, fixed deposits allow full use of the tax exemption provision to claim deductions up to 1.5 lakh.
  • If your fixed deposit is meant explicitly to save on taxes, the best advantage is that it will not depend on the market.
  • That gives more space to senior citizens as it gives assured returns at lower risks.

Additional read: What is a Tax Saving Fixed Deposit?

Conclusion

Whether with banks or corporates, fixed deposits are a secure way to invest with low risk and enjoy guaranteed returns. However, one must be cautious in paying their taxes from the interest income to avoid paying more. Fixed deposits are also the most popular instrument to prevent market risks and make full use of the benefit provisioned by Section 80C.

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  Please note, corporate fixed deposits and filing of Tax related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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