Are you confused about the Fixed Deposit TDS rate and its application, this article will clear all major concepts of TDS on FD interest.
Why TDS is deducted on FD?
FD commonly known as fixed deposit, this is deposit money that an Individual maintains in a bank or in any financial institutions. The money (fixed deposit) earns Interest which is paid by the bank according to the market rate of interest. This interest, being income of person holding deposit, attracts tax liability as it is included in taxable income of the person as per the Income Tax Act.
Banks deduct tax at source (TDS) and pay this tax amount to the government at a specified rate. This TDS is deducted every year from individual’s annual interest amount and is deposited to the government. The bank will pay interest after deducting the TDS i.e. net of TDS.
Example 1– If Mr. A has maintained a fixed deposit of Rs. 10,00,000 @8% Interest rate for 5 years then annual interest will be Rs. 80,000 , and suppose TDS rate is 7.5% then the tax will be deducted @7.5% on Rs. 80,000 which is equal to Rs. 6,000. This amount of TDS (Rs. 6,000) will be deposited to the government and Mr. A will Receive Rs. 74,000( net of TDS) annually.
How to adjust TDS on FD interest?
Like in above example, Mr.A can see this TDS deducted in Form 26AS by logging into his Income tax portal. And at the time of Income tax return filing, this amount of TDS will get adjusted from the total tax income tax liability of the Mr. A.
If TDS on FD interest is more than the actual tax liability of Mr. A, then he can claim refund of excess TDS deducted.
What is TDS rate on FD interest?
Section 194A of Income Tax Act deals with FD interest TDS rates.
If the Interest Income from all FD’s pertaining to a bank in a financial year is less than Rs. 40,000 (Rs. 50,000 in case of Senior Citizen) then the Bank or any other Financial Institution is not liable to deduct any TDS on fixed deposit.
If the Interest Income From all FD’s pertaining to a bank in a financial year exceeds Rs. 40,000 (Rs. 50,000 in case of Senior citizen) then the bank or any Financial Institution is Liable to deduct TDS @10% ( Interest rate has been reduced to 7.5% due to covid-19 from 14/05/2020 till 31/03/2021.)
If the individual does not furnishes his PAN number then bank or any other financial Institution is liable to deduct TDS @20%
Example 2– If Mr. A has maintained a Fixed deposit of Rs. 4,00,000 @8% Interest rate for 5 years then annual interest will be Rs. 32,000 , IN THIS CASE BANK WILL NOT BE LIABLE TO DEDUCT tds AS THE INTEREST Income has not crossed Rs. 40,000.
Example 3– If Mr. A has maintained a Fixed deposit of Rs. 4,00,000 @8% Interest rate for 5 years then annual interest will be Rs. 32,000 , and another FD Of Rs. 2,00,000 @8% interest rate for 5 years then annual interest would be Rs. 48,000 on both FD’s.
Suppose TDS rate is 7.5% then tax will be deducted @7.5% on Rs. 48,000= Rs. 3,600.
This amount of TDS (Rs. 3,600) will be deposited to the government and Mr. A will Receive Rs. 44,400( net of TDS) annually.
Mr.A can see this TDS deducted in 26AS by logging Into his Income tax portal.
This will continue for the rest of five years . And at the time of Income tax return filing this amount of TDS Will be adjusted from the total tax liability of the Mr. A.
How to get exemption from TDS on FD interest?
If an Individuals Income is less than Rs. 2.5 lacs for the financial year, then bank is not liable to deduct TDS as the individuals income is not crossing minimum taxable amount(as per income tax slab).
For this, an Individual has to furnish Form 15G/15H to the bank in order to receive interest amount without TDS deduction.
Example-4 – If in example no-3, suppose Mr. A is a senior citizen then entire Rs. 48,000 will be exempted from TDS as it does not cross Rs. 50,000 limit applicable to senior citizen.
Due to Covid -19 The Finance Minister has reduced to rate of TDS by 25% to ensure more funds in the hands of Investors, so from 14/05/2020 to 31/03/2021 TDS on F.D U/S 194A is reduced to 7.5% (earlier it was 10%).
Important Tips for you
You can claim exemption under section 80TTB for fixed deposit interest of Rs. 50,000 in your income tax return, if you are senior citizen.