Taxability of Interest Income

• Interest earned on fixed deposits is treated as income from other sources.
• It is fully taxable in the hands of the account holder.
• The amount is added to the individual’s total annual income.
• Tax is calculated as per the applicable income tax slab.
• There is no separate or lower tax rate for FD interest.

TDS (Tax Deducted at Source) by Banks

• Banks deduct TDS if the total FD interest exceeds a certain threshold in a financial year.
• TDS is 10% if PAN is provided and 20% if PAN is not updated.
• The current exemption limit for TDS is ₹40,000 per year (₹50,000 for senior citizens).
• TDS is deducted at the time of credit, not at maturity.
• The deducted amount is reflected in Form 26AS and bank statements.

Tax Reporting and Filing

• Interest income must be reported in the income tax return (ITR).
• Even if TDS is not deducted, the interest must still be disclosed and taxed.
• Taxpayers must include cumulative interest from all FDs across banks.
• Mismatch between reported income and TDS can attract scrutiny.
• Form 16A issued by the bank shows the TDS amount deducted.

Exemption Through Forms 15G/15H

• Individuals with income below the taxable limit can submit Form 15G.
• Senior citizens eligible for exemption can submit Form 15H.
• These forms prevent banks from deducting TDS on interest.
• Forms must be submitted at the beginning of each financial year.
• Incorrect submission may result in TDS and penalty for false declaration.

Tax Planning Considerations

• Spread FDs across banks to stay below the TDS limit at each bank.
• Use tax-saving FDs under Section 80C to reduce taxable income.
• Reinvest interest earnings in eligible investment options for further benefits.
• Consider splitting FDs between family members in lower tax brackets.
• Monitor annual interest accruals to avoid unexpected tax liability.