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TDS Rules for Interest on Fixed Deposit:

One of the oldest and most common savings avenue, Fixed Deposits are favourite investment option for most of the people, specially for the risk averse people. However while investing in FD's one must know that interest income from FD is taxable and hence shall be added to total income as income from other sources.

As per Income Tax Rules, if interest income on your Fixed Deposit exceeds Rs. 10,000 in a year, bank is required to deduct TDS @ 10% on interest earned. In case someone has taxable income, there is no problem, as credit of TDS can be availed at the time of filing of Income Tax Return. However in case a person does not have taxable income (before availing benefit under section 80C) he may submit Form 15G /15H for non deduction of tax on FD interest.

When will TDS be deducted?

TDS is deducted when your total interest income of fixed deposit from a branch exceeds Rs. 10,000. Savings bank interest and Recurring Deposit interest are not subject to TDS. In case you have fixed deposit with different branches then limit of Rs. 10000 will be considered for each branch separately. Important thing to remember is that TDS is deducted on the basis of interest earned by you (may be not actually received in case of long term deposit).

Example – In case you have two Fixed Deposits of Rs. 1 Lac each with two different branches of XYZ Bank earning interest @ 8% p.a. In this case you will be earning Rs. 16000 in total towards interest. Since your interest income from any branch does not exceed Rs. 10000, TDS will not be deducted by any branch.

What to do if Interest Income is expected to exceed Rs. 10000?

  • When total income falls under tax bracket: If your interest income exceeds Rs.10000, bank will deduct TDS from your interest income. As your total income is taxable, there is no problem. While finalising your income tax return you should add your FD interest income to your total income and take credit of TDS deducted by Bank.
  • When total income doesn't fall under tax bracket: If your interest income exceeds Rs.10000, bank as per their applicale rules will deduct TDS @ 10% on your interest income. To avoid this you may submit Form 15G / 15H to your bank for non deduction of TDS. However if you miss submission of Form 15G /15H or even after your submission of these forms Bank has deducted tax, you can claim refund of that TDS from Income Tax Department by filing your Income Tax return of the relevant year. Here one thing to note is even if you file a belated return, you are entitled for the refund.
Interest from Multiple Option Deposit Plans commonly known as MODs:
Interest on MODs shall not be confused as interest from savings bank account. Interest earned on MODs offered by banks is interest on Fixed Deposits, hence TDS rules are applicable. MODs are multiple option deposit plans offered by banks, whereby some minimum limit is kept in your savings account and rest amount is automatically converted to FD. However if you give a check above the minimum amount, it will not be dishonored. Funds to honor the check will be arranged from your FD and amount of FD will be modified. Banks have their rules and limits for MODs. With MODs you get interst rate of FDs and liquidity of a savings account.

When may credit of TDS be denied?

Credit of tax deducted on your interest can only be denied to you if the same is entered to wrong PAN. This may happen when the PAN details submitted by you to your bank are wrong. One more reason for this can be a mistake by bank while entering your PAN details in their TDS Returns. Due to error in PAN your due TDS will be updated for the incorrect PAN. So you must always check that your TDS is updated in your 26AS as well.

Do not split FDs for avoiding TDS:

Sometimes people feel that they should split their investment in FDs by creating FDs with different banks. This way interest from one bank will not cross the limit of Rs. 10000, and there will be no TDS by banks. But this is incorrect and we request all not to do this. If you are under tax bracket, you should pay tax on your FD interest income too, so there is no problem if tax at source is deducted by bank. If you are not in tax bracket, submit Form 15G/15H, and bank will not deduct tax, or file your IT return and claim refund.

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Quick Links:
All about Tax saving FDs
Interest from Savings Bank Account & Section 80TTA
Recurring Deposit(RD) interest-How taxable?

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