FD Income Tax Rules And Interest Rates: Tax saving is an important part of financial planning and there are many investment options that can help with this. If you are looking for a low-risk investment option for your portfolio, consider fixed deposits (FDs). It is one such low-risk investment that offers assured and stable returns. Fixed deposits are suitable for different term goals and help reduce the risk of your portfolio. However, like any other investment, FDs are also subject to certain tax rules that can affect your final returns. Understanding these tax rules can help you decide if FDs are right for you and avoid unexpected tax liabilities.

income tax on interest

Interest income from fixed deposits falls under "Income from Other Sources". This income is added to your total taxable income and taxed as per the applicable tax slab. For example, if you fall in the 20% tax slab and receive interest of Rs 55,000 from FD, this interest will be added to your total taxable income, and you will have to pay 20% tax on it.

Tax Deducted at Source (TDS)

If your interest income from FD exceeds Rs 40,000 in a financial year, banks and financial institutions deduct tax at source (TDS) on the interest. For senior citizens, this limit is slightly higher at Rs 50,000. If you provide your PAN number to the bank, the TDS rate is usually 10%. However, if your total taxable income is less than the taxable limit, you can avoid TDS deduction. For this, a person below 60 years of age has to submit Form 15G and senior citizens have to submit Form 15H.

Tax on premature withdrawal

Premature withdrawal from FD usually attracts a penalty, and the interest income on it will be taxed as per your tax slab. The penalty levied on premature withdrawal can reduce your total interest income, but this penalty is not tax deductible.

Tax on interest from tax-saving FDs

Tax-saving FDs are eligible for tax exemption under Section 80C of the Income Tax Act 1961. Under this, an investment of up to Rs 1.5 lakh in such FDs can be exempted from taxable income, thereby reducing your tax liability. However, the interest earned from such FDs is taxable and if it exceeds Rs 40,000, TDS is also applicable. While investing in FDs, it is important to understand what tax impact will be on your investment. If you are planning to open an FD, do not forget to check the interest rates being offered by major private banks.

Bank and Fixed Deposit Interest Rates (1-2 Year Tenure)

Data compiled by BankBazaar.com. Data is as on December 13, 2024 on the website of the respective banks; for each tenure range, the maximum interest rate offered has been considered; interest rate is for normal fixed deposit amount of less than ₹1 crore.