Every Fixed Deposit investors should know the five tax rules 

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Every Fixed Deposit investors should know the five tax rules 

When it comes to growing money, Fixed Deposit (FD) is a staple investment option for Indian investors. In an FD, the principal is secure and the interest rates are decent and steady. From day one, the investor knows exactly what he/she will be getting upon term expiry. Despite the popularity of FD, most Indian investors are unaware of applicable tax rules. If you too are one among them, here’s your chance to beef up your knowledge for legit tax savings on FD.  

 

  1. Tax saving FD

Have you heard of Tax Saving Fixed Deposit (FD)? It’s just like a regular fixed deposit but with tax benefits. The tax saving FD is exempted from tax by Section 80C of the Indian Income Tax Act, 1961. The deductions up to INR 1.5 lakh can be claimed in a given financial year. Simply put, an investment worth INR 1.5 lakh is straight away subtracted from your gross taxable income. Here, your principal is tax-free while only the interest component attracts TDS. This FD fetches your interest between 5.5 and 7.75%, depending on the bank and the amount invested. The lock-in period is 5 years with no provision for premature withdrawals.  

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  1. Types of accounts

Tax saver FD can be held individually or jointly. Regardless of whether you open an account separately for yourself, your minor child or your non-working spouse, tax on interest is unavoidable. In a joint account, the first account holder receives tax rebate up to INR 1.5 lakhs yearly, as defined by the Section 80C of Indian IT Act. Similar dedications are available on NRE FD accounts under Section 10 (4) (ii) of the Foreign Exchange Management Act, 1999.     

 

  1. TDS deduction on interest income

The earning from a regular FD or a tax saving FD is fully taxable. That’s in sharp contrast to the savings bank account where annual interest up to INR 10,000 is exempted from tax. In the case of FD, an annual interest income above INR 10,000 will attract TDS deduction at a rate of 10%. It’s advisable to provide your Permanent Account Number (PAN) to the bank at the time of account opening. Failing this, the TDS deductions can shoot to 20%. 

 

  1. Interest income declaration

While you aim to earn the highest FD rates, don’t forget to declare your total interest earnings yearly in your ITR. That applies for both, cumulative and non-cumulative interest payouts. For starters, the cumulative option offers interest when the term expires, while the non-cumulative one offers interest payouts monthly, quarterly, half-yearly and annually. Your bank will be subtracting TDS on your interest income, which is deposited under your PAN. The non-declaration of interest earnings may result in a disparity in your 26AS statement and returns. 

 

  1. Investments across branches

People tend to open FD in two branches of the same bank to earn the highest FD rates and escape TDS. However, that’s all but reality. Your total interest income across all accounts and branches is aggregated. The idea is to determine whether your net interest income is INR 10,000 or less.

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