Tax Implications Of Fixed Deposits: What You Need To Know

Fixed deposits (FDs) have long been a popular investment choice, offering guaranteed returns and capital safety. However, it’s essential to understand the tax implications associated with FDs to ensure you make the most of your investments. In this article, we will cover the taxation of fixed deposits, the use of digital tools like FD online services, and how an FD calculator can help with long-term planning.

Interest income from FDs and taxation

The interest earned on fixed deposits is considered part of your taxable income. It is added to your total income for the financial year and taxed according to your applicable income tax slab rate. For instance, if you are in the 20% tax bracket, the interest from your FD will be taxed at 20%, making it crucial to account for taxes when calculating your overall returns.

Unlike some other investment options, FD interest is not tax-exempt. Every year, the interest income is added to your annual income, and the tax is calculated accordingly. This can reduce the effective returns from your FD, so it’s important to plan accordingly, particularly when investing in long-term deposits.

Tax Deducted at Source (TDS)

Banks and financial institutions are required to deduct Tax Deducted at Source (TDS) on interest earned from your fixed deposit if the interest exceeds Rs. 40,000 in a financial year (Rs. 50,000 for senior citizens). The TDS rate is set at 10% if you have submitted your PAN to the bank. If not, the TDS rate increases to 20%.

While TDS is deducted by the bank, it may not cover your full tax liability if you fall into a higher tax bracket. For instance, if your slab rate is higher than 10%, you will need to pay the remaining tax when you file your income tax return. It's important to monitor your TDS deduction and adjust your overall tax calculation when filing returns.

Using FD online services to manage your investments

FD online services provided by most banks allow you to easily manage your fixed deposits, track interest earnings, and calculate taxes. Through these services, you can monitor when your interest income crosses the TDS threshold and ensure that all tax deductions are accounted for properly.

FD online services make it convenient to apply for new fixed deposits, renew existing ones, and get access to your tax statements quickly. Having an overview of your FD portfolio online helps you plan better and avoid unnecessary TDS deductions.

Avoiding TDS deductions

If your total income falls below the taxable limit, you can avoid TDS on your FD interest by submitting Form 15G (for individuals below 60) or Form 15H (for senior citizens). By submitting these forms, you declare that your income is below the taxable limit, which exempts you from TDS deductions. It is essential to submit these forms at the start of the financial year to ensure that the bank does not deduct TDS from your interest earnings.

FD calculator for long-term planning

An FD calculator is a helpful tool that allows you to estimate the returns on your fixed deposit over a specified tenure. It helps you input details such as the principal amount, interest rate, and deposit tenure to calculate the interest you will earn over time. By using an FD calculator, you can also estimate your tax liability on the interest earned, helping you plan for your long-term financial goals.

An FD calculator for long-term planning is particularly useful when investing for extended periods, as it helps you understand how your investment will grow and what taxes you might owe over the years. Using an FD calculator can give you a clearer picture of your post-tax returns, ensuring that you make informed decisions about your investment.

Tax-saving fixed deposits

For those looking to reduce their taxable income, tax-saving fixed deposits are an option. These FDs come with a lock-in period of five years and qualify for tax deductions under Section 80C of the Income Tax Act. You can claim a deduction of up to Rs. 1.5 lakh per financial year for investments made in tax-saving FDs.

However, it’s important to note that while the principal amount invested in tax-saving FDs is eligible for deduction, the interest earned is still taxable. You will need to declare the interest income and pay the appropriate tax on it during each financial year.

Optimising your FD investments

To make the most of your fixed deposit investments, consider the following strategies:

• Monitor your interest earnings: Use FD online services to keep track of your interest income and ensure that TDS is being deducted appropriately.

• Use an FD calculator for long-term planning: When planning for long-term financial goals, an FD calculator helps you estimate your returns and tax liabilities. This allows you to choose the right tenure and deposit amount that suits your needs.

Conclusion

Understanding the tax implications of fixed deposits is crucial for maximising your returns. While FDs offer stability and guaranteed interest, the taxes on those earnings can affect your overall returns. By using FD online services and leveraging tools like an FD calculator for long-term planning, you can better manage your investments and reduce your tax burden.

Making informed decisions about tax-saving FDs, TDS deductions, and interest earnings will help you optimise your fixed deposit portfolio and achieve your financial goals with greater clarity.

(Note: This article is written by the Brand Desk.)