Tax Exemption on Fixed Deposit

Fixed Deposit is one of the most recommended investment options, one of the most predominant reasons being its income tax saving feature. Investing in Fixed Deposits on which tax deductions can be availed, as per Section 80C of the Income Tax Act, 1961. This enables investors to save on taxes while building a robust corpus.

These are accompanied by a healthy rate of interest that is comparatively higher than what is offered on savings bank account. The fixed interest rate ensures consistent growth, helping investors to predict the maturity amount. The invested amount is protected against the volatility of capital market, emphasising on FDs being a safe investment instrument. Tax exemptions on Fixed Deposits had been introduced by the Government of India in the year 2006 and are applicable on FDs with a tenure of 5 years and more.

Benefits of Investing in Tax Saver Fixed Deposits

The benefits of tax saver fixed deposits are as follows:

Tax exemptions are applicable on tax saver fixed deposits, as per Section 80C of the Income Tax Act, 1961.
Tax saver fixed deposits are offered by public as well as private sector banks, ensuring ease of investments.
FD investments are quick and convenient since it is possible to invest in an FD online through a chosen bank’s official website or offline by visiting any branch of the chosen bank.
The minimum investment amount for tax saver FDs differs between banks, enabling investors to choose from a wide range of options, as per their unique objectives.
Investments towards FDs are not exposed to capital market volatility and their growth is determined by the fixed interest rate, offering guaranteed returns. This makes them a safe investment option.
The interest rates of tax saving fixed deposit are comparatively higher than that of a savings bank account. Interest rates of tax saving fixed deposits for senior citizens are even more lucrative.
Interest is payable on a non-cumulative FD through monthly, quarterly and annual basis that investors can select from as per their objectives, ensuring flexibility yet again.
The tax saving fixed deposit offers the convenience of appointing a nominee who will be eligible for receiving the accrued amount on the death of the holder.
Investments towards tax saving fixed deposits can be made throughout the year, unlike investments like government issued tax free bonds.

How is Interest Income Taxed?

Interest income from tax saver Fixed Deposits is fully taxable. This income is classified under the ‘Income from Other Sources’ category in your IT Return. This income is considered as a part of your total income and, therefore, gets taxed as per the tax slab rate that is applicable to your total income. Your bank deducts this tax at source when they credit the interest to your account. This implies that if you open a tax saver FD for 5 years, your bank will deduct TDS at the end of every financial year and not when the FD matures.

How to Calculate Tax on Interest Income?

Follow the steps below to understand your share of TDS from the interest income of your tax saver Fixed Deposit.

During tax calculations at the end of every financial year, add the interest income to your total annual income in your ITR each year.
Check the tax slab rate that is applicable to you, as applicable for that financial year.
Check whether your result is the same as that which has been deducted by your bank.
In case no TDS is applicable for you, you have to add the interest income to your total income and pay tax on it.
In case you decide to wait till the maturity of your tax saver FD when you will actually receive the interest income, it will probably fall under a much higher income tax slab and, hence, you will have to pay a higher tax.

Understanding TDS on FDs

Here are some facts that you have to be aware of:

Make sure that you submit Form 15G and Form 15H at the beginning of every financial year to the banks where you hold FDs. This will eliminate the hassled process of unnecessary TDS deductions throughout a certain financial year and subsequent refund later.
Your bank cannot deduct TDS when your interest income from all Fixed Deposits is less than Rs. 40,000 in a certain financial year, as per Budget 2019.
When the interest income from all your FDs is more than Rs. 40,000, a TDS deduction of 10% will become applicable.
When your bank does not have your PAN details, 20% TDS will be deducted from the interest income from all your FDs.
TDS deduction will not be applicable if your total annual income is less than Rs. 2.5 lakhs and you submit Form 15G/H, which is the minimum taxable amount for FY 2018-19. This will stand true even if your annual interest income from all your FDs is more than Rs. 40,000. Banks cannot deduct TDS from your interest income when no taxation is applicable on your total annual income.

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FAQs on Tax Exemption on Fixed Deposit

Is FD exempted from tax?

Interest income from Fixed Deposits is fully taxable. However, tax exemptions are applicable as per Section 80C of the Income Tax Act, 1961.

Can FD be used for tax exemption?

Tax exemption on Fixed Deposit is applicable as per Section 80C of the Income Tax Act, 1961. However, company Fixed Deposits do not attract tax exemptions under Section 80C of the Income Tax Act, 1961.

Can I break my 5 years fixed deposit?

Tax saving Fixed Deposits have a lock-in period of a minimum of 5 years and, hence, the invested amount cannot be withdrawn before the completion of the maturity term. Premature withdrawal is offered against such Fixed Deposits only on certain terms and conditions.

Is interest on 5 year FD taxable?

Yes, interest income on FDs is fully taxable, irrespective of the maturity term.