It needs to be noted that interest income on FDs is fully taxable.
Under fixed deposits, 10% TDS is applicable if the amount of interest earned exceeds ₹40,000 for individuals, while the rate is applicable on interests amounting to over ₹50,000 for senior citizens. However, if you have not intimated your Permanent Account Number (PAN) details to the bank, then the TDS rate is 20%.
According to income tax services provider, Clear report, it should be remembered that the TDS is deducted at the time of credit of interest and not when the FD matures. So, if you have an FD for 3 years – banks shall deduct TDS at the end of each year. (See below for more details on TDS on FDs).
Here's an example as per Clear:
For instance, if you earn FD interest of ₹100, the bank would deduct 10% TDS i.e Rs.10, and deposit it to the government. While reporting the interest income in ITR, you have to report the entire interest earned of Rs.100 in your ITR and claim the TDS deducted by the bank of Rs.10 as a TDS refund or tax credit from the outstanding liability, as the case may be.
In another example, Ritwik falls in the 20% tax bracket and has two FDs with a bank of ₹1,00,000 each for 3 years tenure with 6% interest per annum. In the first year, Ritwik’s interest income is ₹6,000 from each of the FDs, total interest accrued is ₹12,000 in the first year. Bank does not deduct TDS for annual FD interest below ₹40,000.
Meanwhile, in another example, Anurag has a fixed deposit of ₹10 lakh at an interest rate of 6% p.a. He receives an annual interest of ₹60,000. The bank deducts TDS on the whole of ₹60,000 at 10% i.e Rs.6000. The prescribed rate of TDS is 10%.
TDS takes place when a person (deductor) who is liable to make payments of specified nature to another person (deductee) --- shall deduct tax at the source and remit the same into the account of the Central Government. The deductee from whom taxes have been deducted at source would be entitled to get a credit of the amount so deducted based on Form 26AS or TDS certificate issued by the deductor.
An FD holder can submit form 15G/15H to get exemption from Tax deduction as per Income Tax Rules.
As per Income Tax Act, an exemption of ₹1.50 lakh in a financial year is allowed under section 80C for FDs.
