The interest that is earned on the Fixed Deposit is not tax free but is taxable. The tax on fixed deposit is levied as per the Income Tax Slabs of the person earning the interest. (Recommended Read:- Income Tax Slab Rates)
As the income tax slab rate is different for different individuals, the Tax on Fixed Deposit is also different for different individuals depending on the total income earned by the taxpayer during that year. The Income Tax Slab Rates vary from 0% to 30%.
TDS on Fixed Deposit
TDS on Interest on Fixed Deposit is liable to be deducted @ 10% by the Bank if the amount paid or expected to be paid during the financial year exceeds Rs. 10,000. This limit of Rs. 10,000 is per bank per individual.
In case the amount is received from different branches of the same bank, the total aggregate amount if exceeds Rs. 10,000 would attract TDS.
This limit for non-deduction of TDS has been increased from Rs. 10,000 to Rs. 50,000 in case of senior citizens in Budget 2018. (Recommended Read: Tax Benefits for Senior Citizens)
TDS on Interest on Fixed Deposits basically means that at the time of payment of interest, the bank will deduct 10% of the interest as TDS (Tax Deducted at Source) and deposit this amount with the govt in your account. This amount so deducted would form a part of the total tax that has been paid by you.
If your total tax liability is more than the TDS that has been deducted you would be required to pay the tax shortage. If the total tax liability is less than the TDS that has been deducted, you can apply for Refund of TDS.
As per Section 206AA, in case the interest payable by the bank is more than Rs. 10,000 and PAN No. has not been submitted by the taxpayer, TDS @ 20% would be deducted in this case. The main motive of this provision is to encourage people to submit their PAN Card No. to the bank or else the TDS would be deducted at a higher rate. In case you don’t have a Pan Card, you can make an application in Form 60 stating that you don’t have a PAN Card.
Nil Deduction of TDS on Fixed Deposit
There may be cases wherein the total aggregate tax liability of a person during a year is Nil but still TDS is being deducted by the Bank because the interest payout is more than Rs. 10,000.
In such cases, the taxpayer has to request for TDS refund at the time of filing of income tax returns.
This in many cases becomes burdensome for the tax payer because first his TDS is being deducted, then this TDS is deposited with the govt, and then he has to claim the refund of such TDS. To reduce such hardships faced by taxpayers, the govt has introduced Form 15G & Form 15H.
As per Section 197A, if a taxpayer furnishes a declaration in Form 15G/ Form 15H to the bank for Nil/Lower deduction of TDS, the TDS in such cases would be deducted at the lower rates as specified in these declaration forms.
- Recommended Read: Procedure for furnishing Form 15G & Form 15H for lower TDS Deduction
The validity of such declaration forms is only 1 year and a new form is required to be submitted every year for nil/ lower deduction of TDS on Interest on Fixed Deposits.