Understanding Tax Implications: How Fixed Deposits Impact Your Finances

Millions of Indians put their trust in Fixed Deposits (FDs) for their low-risk, predictable returns, loan facilities, and flexible features. You simply deposit a lump sum amount and enjoy a fixed interest rate throughout the chosen tenure. Moreover, the Deposit Insurance and Credit Guarantee Corporation (DICGC) backed insurance coverage of up to Rs 5 lakh further enhances their appeal.

But what about the tax aspect? While fixed deposits provide financial stability, the interest earned is subject to taxation and impacts your overall returns. Let’s understand these tax implications and how they impact your finances so that you can make more informed decisions to maximise your returns.

Taxation on interest earned from fixed deposits

Interest taxation: The interest income from your fixed deposit is categorised under "Income from Other Sources" in your Income Tax Return (ITR) and taxed according to the income tax slab you fall into. For instance, if you are in the 30% tax bracket, the interest income from your FD will be taxed at 30%.

Tax Deducted at Source (TDS): Banks deduct TDS on interest income from FDs when the interest amount exceeds Rs 40,000 in a financial year (Rs 50,000 for senior citizens). The rate of TDS is 10% if you have provided PAN and 20% if not.

How to claim TDS exemption on FDs?

If your total income is below the taxable limit, you can submit Form 15G (for those under 60 years) or Form 15H (for those aged 60 and older) to the bank to avoid TDS deduction. These self-declaration forms are suitable for residents whose total tax liability is zero. Submit forms 15G/15H at the beginning of the financial year to ensure they are processed timely.

Look at the exemption limits for different age groups:

- 2.5 lakh for individuals below 60 years
- 3 lakh for senior citizens aged 60 to 79
- 5 lakh for super senior citizens aged 80 or above

If you fail to submit Form 15G/H and the bank deducts TDS, you can still claim a refund while filing your tax returns.

Know how tax implications on FDs can impact your finances

Reduction in total returns: The actual returns you get after tax deduction can be significantly lower than the interest rate offered by your FD. For example, if you are in the 30% tax bracket, a 6% interest rate on an FD may reduce to 4.2% after tax.

TDS is not the final tax liability: TDS deducted by the bank is only a part of your total tax liability. The tax liability calculated on FD depends on your income tax slab for that specific financial year. You may need to pay additional tax or claim a refund when filing your income tax return.

Impact on total income: The interest income from FDs gets added to your total income, which could push you into a higher tax bracket and lead to higher overall tax liability.

Inflation adjustment: Low FD interest rates may not keep pace with inflation. After accounting for taxes, the actual rate of return (interest rate minus inflation rate and taxes) can be low.

Tips to minimise your taxability on FD interest

While you must pay fixed deposit tax without fail, there are practical strategies to minimise your tax liabilities.

1. Book a tax-saving fixed deposit

Invest in a five-year tax-saving fixed deposit, which allows a deduction under Section 80C of the Income Tax Act, 1961. Although the interest is taxable, the principal amount qualifies for a tax deduction up to Rs 1.5 lakh annually.

The key here is to choose IndusInd Bank Fixed Deposits, which can amplify the tax benefits with competitive interest rates and value-added benefits like:

You can even use a fixed deposit calculator to understand how much your FD will grow by its maturity date. It can help you choose an appropriate tenure for your cumulative FD to achieve the best possible returns.

Book your IndusInd Bank Fixed Deposit today with a 100% digital process!

2. Capitalise on the higher FD rates offered to senior citizens

Senior citizens typically receive preferential interest rates on FDs and benefit from higher TDS thresholds. TDS is not deducted unless the interest exceeds Rs 50,000 in a financial year. Investing in FDs in the name of a senior citizen family member can reduce the tax payable on FD income and boost your overall returns.

3. Time your FDs wisely

Strategically schedule the maturity of your deposits to manage the impact on your annual taxable income. For example, you can set your FDs to mature in years when you predict a lower income, perhaps due to seasonal downturns or entering retirement. This way, you can prevent the lump sum interest from pushing you into a higher tax bracket.

4. Ladder your FDs

Instead of putting a large lump sum amount in one FD, spread your money across multiple FDs that mature at different times. It can help in managing how much interest you earn each year. Keeping the interest below the TDS threshold can minimise or bring your TDS to zero. This strategy offers a steady income stream and makes tax planning more efficient.

To sum up

Understanding the tax implications of fixed deposits is crucial for making informed financial decisions. Taxes can impact the total returns you get from your FD investments, thus reducing your purchasing power and potential for growth.

However, it is possible to reduce tax liability and protect returns through strategies like booking tax-saving FDs, capitalising on senior citizen deposits, laddering your FDs, and submitting Form 15G/15H when applicable. By effectively managing the tax aspects of your FDs, you can keep your investments as profitable as possible.

Now that you understand the tax implications of FD investments, what are you waiting for? Take the next step and book your fixed deposit today!

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