Why is the TDS charged on Fixed Deposit Interest? What are the TDS rates applied on FD?

Know - How  about the TDS charged on the Fixed Deposit Interest?

How is TDS charged on a Fixed Deposit?

Fixed deposit is one of the most popular investment plans. This investment scheme is offered by several banking and non-banking sectors for a different set of periods. Fixed deposits are invested for long periods usually. If an FD is made for a certain period, for example, five years, it can not be withdrawn before that without compensation. However, in return, the financial institutions provide a huge amount as the interest of the principal amount.

The interest on the fixed deposit is an income to the account holder and is taxable. However, the TDS is deducted only when the interest amount crosses a threshold limit.

What are the TDS rates applied on FD?

TDS rates are applied depending on the residential status of the assessee:

• Indian Resident - The TDS on FD is 7.5% for the financial year 2020-21, subject to the submission of PAN card details. If the assessee is unable to show the PAN details, the TDS deducted will be 20% of the interest amount earned.

The new rate of interest is effective from 14 May 2021.

• Non-Resident Indian - The TDS rate for the NRIs is 30% which is charged on the interest earned on FDs, along with the cess and surcharge as applicable by the government policy.

How is TDS on FD calculated?

The calculation of the TDS is quite simple. For example, you have invested an amount of Rs 1 lakh as FD and you are getting 10% interest, which amounts to Rs 10,000 for the first year. Therefore, at the rate of 7.5% per annum -

10,000 * 7.5% = Rs 750, if the investor submits PAN details.

In case of non-availability of the PAN details at the rate of 20% per annum-

10,000 * 20% = Rs 2,000

has to be paid as TDS on FD.

Important elements of TDS on FD

Here are some basic key points which are followed when the TDS is deducted from the income earned through interest:

• The tax is deducted on the amount incurred as interest on the principal amount. The tax is not calculated on the principal amount.

• The investors, if come under the higher income tax slab of 20% and 30%, the then TDS on FD shall be filled as self-assessment tax.

• Depending on the income of the investor, if the total income is less than the amount specified by the government policy, the investor can claim a refund if the tax deducted from the income interest.

• Bank deducts the TDS annually. It is not possible to club all the tax amount together and pay at once at the time of maturity.

• The income from the interest on FD comes under the heading of 'other income'

How can the TDS be waived?

Tax saving is a tricky part, where you are saving on the tax amount, without violating any law. Here are certain tricks for the same:

• If you invest in the middle of the year, the bank calculates the tax on the interest incurred till the year-end. Therefore, the interest in a year gets divided into two parts which may end up to an amount less than the tax eligible amount.

• Submit the form 15G and 15H to save the tax deducted at the source.

• Instead of investing the full amount in one FD, divide it into multiple FDs. Also, you can consider other investment plans.

What is the exemption limit of TDS?

Every financial year, the exemption limit for TDS on FD interest is Rs 10,000, which is higher for the senior citizens, i.e. Rs 50,000.

However, the FCNR FDs, Post office FDs, NRE FDs and recurring deposits are excluded from the exemptions.

Senior Citizen benefits on TDS on FD

An exemption is allowed to the senior citizens on the interest incurred by the fixed deposit, under Sec. 80TTR of the Income Tax Act 1961. No TDS shall be deducted till the interest amount of Rs 50,000 is incurred annually on the principal amount.

The deduction of tax on FD is the responsibility of the bank, for this, you neither require to remind any bank employee or pay any extra amount.