How to avoid TDS on bank fixed deposits? Here’s what you can do
Fixed deposit (FD) is a financial instrument provided by banks or Non-Banking Financial Companies (NBFCs) on deposit of a lump sum amount at an agreed rate of interest and for a fixed period. FD investments provide a higher rate of interest compared to a savings account. However, withdrawal of the FD amount before the maturity date results in a penalty.
Individuals can claim a deduction under Section 80C of the Income Tax Act up to Rs 150,000 for the amount invested for 5 years in tax-saving FD instruments with scheduled banks.
Taxability of interest from FD
Interest earned from a savings bank account up to Rs 10,000 can be claimed as a deduction under Section 80TTA, but the interest income from FDs is fully taxable in India. However, senior citizens can avail the benefit of exemption of interest income up to Rs 50,000 under Section 80TTB and this interest income includes interest on deposits with banks (fixed and savings), co-operative societies engaged in carrying banking business and post office deposits.
Tax deducted at source (TDS) on FD
Taxes are deducted by the banks on accrual of interest and not on maturity or at the time of payment of interest. The taxes are deducted at source at the rate of 10 per cent, if the estimated interest income during the Financial Year (FY) exceeds Rs 10,000 from all the FDs held with the bank. However, in case of senior citizens, taxes are deducted at source if the interest income exceeds Rs 50,000 from all the FDs held with the bank.
In case PAN is not provided to the bank, taxes would be deducted at the rate of 20 per cent.
Non-deduction of tax at source on FD
There are primarily three instances where the taxes are not liable to be deducted at source:
Firstly, a resident individual whose estimated total income (after Chapter VI-A deductions) during the relevant FY is less than Rs 250,000 (Rs 300,000 for individuals above 60 years and Rs 500,000 for individuals above 80 years) may file a declaration for non-deduction of taxes. A declaration has to be submitted at the beginning of every FY in Form 15G or Form 15H (senior citizens) with the bankers for non-deduction of taxes.
Secondly, it is observed that individuals distribute the investment of FDs in different banks to diversify their investment portfolios. In some cases, the interest income from each bank (includes branches) may not exceed Rs 10,000 during the relevant FY. In such a case, taxes may not be deducted.
Thirdly, FD investments made during the year may result in interest less than Rs 10,000 in the year of investment. For instance, Mr. A deposits in a FD scheme of Rs 2 lakh for a period of 36 months at the interest rate of 8 per cent p.a. on October 1, 2018. In this case, the interest earned during FY 2018-19 would be Rs 8,000 only, resulting in no TDS during FY 2018-19.
Points to be noted
Some individuals may make investments in FD in the name of family members who may have income below the basic exemption limit and such members may also file 15G/H for non-deduction of taxes at source. However, the income from investment in the name of spouse or minor child or daughter-in-law is liable to tax in the hands of the individual (and not the family member) by way of the clubbing provision. In such cases, filing of Form 15G/H is not advisable.
Taxes are deducted at source by the bankers at the rate of 10 per cent. Depending on the tax bracket of the individuals, the deduction may result in additional tax payable or tax refund.
Individuals are required to pay additional taxes if they fall under the 20 or 30 per cent tax bracket or due to clubbing provision and the same has to be remitted by way of advance tax in 4 instalments if the net tax payable on FD and other income (net of TDS) exceeds Rs 10,000 during the FY. In case the net tax payable is less than Rs 10,000, then the taxes can be remitted before filing the income tax return for the relevant FY.
It is important to note that there may be change of facts or circumstances during the FY. For instance, income exceeds basic exemption limit on account of additional income, additional investment made in FD account, incorrect estimation while filing of Form 15G/H etc. In such cases, another declaration has to be filed and details of earlier declarations have to be provided.
To summarize, taxes are deducted by the banks if the interest income exceeds Rs 10,000 or Rs 50,000 (for senior citizens) and no Form 15G/H is filed. Individuals should estimate the total income diligently at the beginning of the year, monitor the total income regularly, pay additional taxes if required and file the tax returns by disclosing all the income accurately.