Tax Saving Deposits: When & how to pay Income Tax on Interest Income?
Fixed Deposits are a very popular form of savings.
Our money is safely kept in FDs, but seldom do we think about paying tax on the
interest income.
How is interest income taxed?
Interest income from Fixed Deposits is fully
taxable. It is added to your total income and taxed at slab rates applicable to
your total income. It is shown under the head ‘Income from Other Sources’ in
your Income Tax Return.
Understanding TDS – When you receive certain
payments the person paying you has to deduct tax before making the payment.
This tax deducted is called TDS and it has to be deposited by them to the govt.
You receive the net amount. You have to then add the gross amount to your
income and adjust TDS against your final tax liability.
Banks deduct TDS on interest income when it is
accrued and not when the FD matures & interest is paid out. So if you have
a FD for 3 years – banks shall deduct TDS at the end of each year. (See below
for more details on TDS on FDs).
How to calculate tax on interest income?
Add interest income to your total income in your
Income Tax Return each year (even though it may not be paid out) and calculate
your tax liability accordingly – matching it with the yearly TDS deduction at
the bank’s end. TDS which has been deducted can be adjusted against your final
tax liability.
Even when no TDS is deducted include the interest
income in your total income and pay tax on it. Suppose you wait until the
maturity of your FD when interest is actually received– your total interest
income may push you up a slab and you may end up paying higher tax.
Automatically
import all your TDS entries from the IT Dept at the time of filing your Returns
– so you don’t miss out on adjusting any of the entries? You can view the
details of TDS deducted on any of your income by viewing your Form 26AS.
When to pay tax on interest income?
If any tax is
payable after inclusion of your interest income in your total income – you must
pay it before 31st March of
the financial year. This is how
you can pay any tax that is due.
In case you have a
large income from interest – Advance Tax may become
payable on a quarterly basis.
Understanding TDS in relation to FDs
·
When Bank doesn’t
deduct any TDS – if your
interest income from all FDs with a bank is less than Rs 10,000 in a year, the
bank does not deduct any TDS.
·
When Bank deducts
TDS @ 10% – Bank
deducts TDS @ 10% from your interest income when it exceeds Rs 10,000 in a
year. The bank will estimate your interest income for the year from all the FDs
you have with the bank and if it exceeds Rs 10,000, they will deduct TDS @ 10%.
·
When Bank deducts
TDS @ 20% – In case
you do not provide your PAN information to the bank, they will deduct TDS @20%.
So do make sure Bank has your PAN details.
·
No TDS is
deductible when your total income is less than minimum amount which is taxable– In the
case of housewives or senior citizens it may be possible that their interest
income in a year is more than Rs 10,000 but their Total Income (including
interest income) is less than the minimum exempt income (Rs 2,50,000 for
financial year 2014-15). Since no tax saving
deposits is payable by the individual no TDS should be deducted by the
bank. But how will the bank know your total income? The only way to make sure
that no TDS is deducted by the Bank is by submitting Form 15G and Form 15H to the Bank. You
have to submit these forms at the start of each financial year – this way Bank
won’t deduct any TDS and you will be saved from waiting for a refund from the
IT Department.
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