What Is A Fixed Deposit?
A fixed deposit (FD) is a type of financial instrument provided by Non-Banking Financial Company (NBFC) or banks that provide the investors with a higher rate of return than an ordinary savings account. It matures after a fixed date. A separate account may not be required for creating a fixed deposit.
The tenure of fixed deposits can vary from 7 days to 1.5 years and can be a maximum of 10 years. There are additional offers that some banks offer, like loans against fixed deposit certificates.
The investments made in fixed deposits are considered to be much safer than Post Office schemes as it is backed up by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Tax Advantages On Fixed Deposit
- Income from interest earned on the fixed deposit is taxable, and tax is charged from the depositor according to his/her income tax slab. If a person earns income above ₹10 lakhs, then a tax liability of 30% will be charged (Education cess and surcharge will be charged extra) while people below exemption will not pay any tax.
- TDS at the rate of 20% is deducted if PAN is not submitted.
- If a person earns a total interest of more than ₹5,000 in a financial year from all of his/her fixed deposit held in a branch, that person becomes liable for TDS filing.
- Interest earned from fixed deposits comes under the head of Income from Other Sources. There are heads of income such as Income From Salary, Income from Business and Profession, Income from House Property, and Income from Capital Gain.
- Under Section 80TTBof the Income Tax Act, senior citizens earning interest from fixed deposits qualify for a deduction of up to ₹50,000 in a financial year. This particular section is made available to senior citizens from April 1, 2018. The benefits of section 80TTA that allows a deduction of up to ₹10,000 from interest earned from a savings account is not available to senior citizens.
- Interest earned or accrued on fixed deposits at the end of the financial year qualifies for TDS deduction. Suppose an individual opts for a cumulative option in a fixed deposit that pays interest at the maturity date, and the individual falls under any of the tax slabs. In that case, TDS will be deducted because the interest is accrued on such fixed deposits.
- In Form 16A, a TDS Certificate is issued in April following the financial year for TDS deducted in the previous financial year.
- Form 26AS, linked with an individual’s PAN number, should show TDS deducted in a financial year. Details in Form 26AS should match the details in Form 16A provided by the bank to the individual.
- The tax liability on interest earned from the fixed deposit is calculated in the first or primary applicant’s name. The second or joint holder is not liable for any tax liability.
- Fixed deposits held by minors, as the first account holder, is also liable for TDS deduction. In such cases, the interest income earned by the minor will be clubbedwith the income of the person with whom the minor’s income is included.
- If the housewife or non-working wife holds the fixed depositas the first or primary account holder from her husband’s money, then income from interest will be merged with that of the husband’s income.
- If the parents hold the fixed deposit as first account holderfrom the money provided by his/her adult children, then income from interest will come under the parent’s income. But if the adult child holds the fixed deposit, then the income from interest will come under the income head of the adult child and not of the parents.
- If an individual acknowledges that his/her total income from interest will not come under the overall taxable limits for the financial year, then he/she should notify the Bank not to deduct TDS on interest on deposits by filing Form 15G or 15H. Sometimes the bank charges TDS despite filing Form 15G or 15H, and therefore the Government has mandated the banks to provide acknowledgment for submission of Forms 15G or 15H.
Declaration Of Interest From Fixed Deposit In Income Tax Return
Interest income from fixed deposits should be disclosed every year. It should be shown on the accrual basis, i.e., interest earned but not yet received (also known as the mercantile basis of accounting).
Form 26AS shows the TDS amount and whether TDS is deducted or not. The TDS is used by the Income Tax Department to verify an individual’s income tax return.
Information To Be Declared for Income From Fixed Deposit In Income Tax Return
Interest earned from fixed deposit should be shown under the head of Interest portion of Income from other sources. For example, if an individual has earned an income of ₹20,000 (without TDS deduction) and TDS to be deducted is ₹2,000 (10% of ₹20,000), then ₹20,000 should be declared under Income from Other Sources, and ₹2,000 should be claimed in TDS.
If deducted on the income from interest, TDS should be claimed by the individual in the Income Tax return and should be shown in the TDS section. The filing information is shown below:
- Unique TDS Certificate Number: A certificate number is a six-digit number that appears on the top right-hand corner of the TDS certificates that the individual generates through the Tax Information Network (TIN) Central System.
- Total Tax deducted: The tax deduction details are to be entered from Form 16A, and the amount of tax should be rounded off to the nearest rupee.
- Deducted Year: The financial year should be mentioned in this column.
- Amount claimed for this year. Generally, this amount will be the same as the amount of tax deducted. This amount cannot exceed the amount of tax deducted, and the amount should be rounded off to the nearest rupee. Details of tax deducted are shown in Form 26AS.
Steps To Calculate Tax Liability For Interest On Fixed Deposit In Income Tax Return
Income from interest earned on fixed deposits is liable to tax in the hands of the investor/depositor as per the income tax slab of the person. If the person earns above ₹10 lakhs, he/she is liable for a 30% tax liability (Education cess and surcharge are to be charged extra). When TDS is deducted, and the person falls under the 30% tax slab category, then he/she needs to pay the remaining 20% tax.
Suppose the person has earned an income of ₹20,000 (without TDS deduction) and TDS to be deducted is ₹2,000 (10% of ₹20,000) then ₹20,000 should be declared under the head of Income from Other Sources and ₹2,000 should be claimed under TDS.
After all the other tax details are entered, the total tax liability is calculated.
For example, in ITR1 Excel, go to the tab Income Details and click on Calculate Tax option to calculate the total tax that the person is liable to pay for the earned income and the deductions that have been declared.
If the person has paid less tax, it will show the difference of tax amount in the ‘Balance Tax Payable’ row of the Income Tax Details.
In the Excel ITR Forms, the white cells with blue labels represent auto calculating fields and are not be filled by the person. The information on those cells is calculated automatically based on information provided in other cells.
If the person has paid more tax amount, then the excess tax paid will be shown in the tax refund row 18 of ‘Taxes Paid and Verification.’
If the amount tax is payable and not paid, then Pay Self-Assessment tax using Challan 280.
What To Do In Case Of Income Tax Refund?
In many cases, TDS was deducted by banks even though there was prior notification provided by filing Form 15G or Form 15H. Many a time, TDS gets deducted even though income is below the taxable limit. In such cases, the excess tax would be refunded to the individual. The individual can claim a tax refund in the following ways:
- Normally fill an income tax return form.
- Show that TDS was deducted in the TDS section.
- Mention interest earned from the fixed deposit of the following financial year as Interest Income under the head of Income from Other Sources.
- While calculating the total tax due, the excess amount will be shown in the ‘Tax refund’ row 18. Check the amount that is going to get refunded.
What To Do In Case Of TDS Mismatch?
Sometimes TDS won’t be reflected in Form 26AS, and in such cases, the individual should contact the bank from where Form 16A was issued. The individual needs to contact the bank and get the information updated in Form 26AS.
In the above-mentioned case, if the individual files a claim for TDS and the following information is absent in Form 26AS, there will be a mismatch in information, and a notice will be served to the individual from the Income Tax Department.