TDS on Fixed Deposit Schemes

Tax Deducted at Source is a mode of tax collection that works on the “Pay Tax as you Earn” pattern. It is a means of collecting income tax in India under the Indian Income Tax Act of 1961.

Here, the entity or person making a payment is responsible for deducting tax at the source if the payment exceeds certain threshold limits. The tax so deducted must then be remitted to the Central Government.

TDS is applicable on various incomes, such as salaries, interest payments, commission payments, professional fees, rent, etc.

The tax authorities prescribe the rates of TDS and the threshold limits which can vary depending on the nature of the payment and the status of the recipient (e.g., individual, company).

The main reason behind introducing TDS is to minimise tax evasion by collecting tax at the time the income is generated rather than at a later date.

The Income tax regulations provide the threshold for TDS deduction on Fixed Deposit (FD) interests. According to the prevailing guidelines, the threshold for TDS deduction on FD interest for individuals, barring senior citizens, is set at ₹40,000. For senior citizens, this threshold increases to ₹50,000.

Additionally, individuals whose total taxable income falls below the basic exemption limit of the income tax qualify for a waiver from TDS deductions on their FD interest.

The Basic tax exemption limits are as follows:

₹2.5 lakh for Individuals below 60 years

₹3 lakh for Individuals between 60 - 80 years

₹5 lakh for Individuals above 80 years

Note:

The threshold limits and conditions are based on information relevant to the Assessment Year 2024-2025 and may be subject to change. Always refer to the latest tax regulations or consult a tax professional for the most current information.

If an individual does not owe any taxes, banks are not permitted to deduct TDS. In such cases, the individual needs to submit Form 15G or 15H, which allows them to claim interest income without the deduction of TDS.

Early Tax Collection: TDS serves as a method to collect tax at the source of income, ensuring that tax is collected in advance rather than at the end of the financial year. This helps in spreading the tax collection throughout the year and aids in the early receipt of tax revenues by the government.

Minimising Tax Evasion: By deducting tax at the source, the government minimises the chances of tax evasion, ensuring that all taxable income is reported and taxed accordingly. It acts as a built-in system to capture tax on income as soon as it is generated.

Ease of Tax Payment for Depositors: TDS on FDs simplifies the process of tax payment for the depositor. Since the tax is automatically deducted and remitted to the government by the bank, the depositor is relieved from the responsibility of paying tax on the interest earned, providing a hassle-free way of meeting tax obligations.

Record Keeping: TDS on FDs also assists in record-keeping for both the tax authorities and the depositor. The bank provides a TDS certificate (Form 16A) to the depositor, which details the amount of tax deducted and can be used by the depositor to claim the tax credit. This ensures transparency and ease of documentation when filing annual tax returns.

The TDS is deducted from the interest income earned in a certain manner and during the specified period as defined below.

Interest Income Calculation: Banks calculate the interest income earned by an individual from all the FDs held with them during the financial year.

TDS rate Calculation:

Let’s assume a 30-year-old assessee earns a total Interest from Bank FD of ₹60,000 in the financial year.

Interest on Fixed Deposit Taxable rate will be 10%.

Then, TDS deductible = 10% X ₹60,000 = ₹6,000

Assessment Against Threshold: The bank assesses this interest income against the prescribed threshold limits. As per current regulations, TDS is deducted on interest income exceeding ₹40,000 for individuals and ₹50,000 for senior citizens.

Deduction at Source: If the interest income surpasses these thresholds, the bank deducts TDS at the rates specified by the income tax laws before crediting the interest to the depositor's account.

PAN Requirement: The rate of TDS can vary depending on whether the depositor has provided their Permanent Account Number (PAN) to the bank. The standard TDS rate is 10% if a PAN is furnished; however, it escalates to 20% if the PAN is not provided.

When is TDS on Fixed Deposits Deducted?

TDS on FDs is deducted at the time of interest credit or at the end of the financial year, whichever is earlier. Banks usually credit interest on FDs quarterly or annually, and TDS is deducted based on the total interest credited:

Quarterly or Annual Interest Payment: If the bank pays interest quarterly, TDS will be deducted every quarter if the interest exceeds the threshold. For annual interest payments, TDS will be deducted at the end of the financial year or at the time of interest payment, aligning with the exceeding of the exemption limit.

At Maturity: For FDs where interest is compounded and paid at maturity, TDS will be deducted annually on the accrued interest, even though the depositor has not physically received the interest. The final deduction occurs at the time of maturity if the accumulated interest exceeds the threshold.

Form 15G and Form 15H are declarations that prevent banks from deducting tax at Source (TDS) on interest income under certain conditions, as per the Income Tax Act, 1961. These forms are crucial for individuals seeking exemption from TDS on their investment income, such as interest from Fixed Deposits (FDs), saving accounts, and other income from corporate bonds.

Form 15G

Eligibility:

Individual taxpayers or Hindu Undivided Families (HUFs) who are residents of India.

The individual's age must be less than 60 years.

Conditions:

Total annual income must be below the taxable limit.

The total interest income for the year is within the threshold limit that is not subject to tax.

The individual must hold a valid Permanent Account Number (PAN).

Form 15H

Eligibility:

Available to individual taxpayers who are residents of India and aged 60 years or above (senior citizens).

Conditions:

The total tax calculated on the individual's total income for the fiscal year should be nil.

The individual must hold a valid Permanent Account Number (PAN).

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