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When & How to Pay Income Tax on Fixed Deposit Interest Income?

Updated on: Mar 16th, 2023


12 min read

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Fixed Deposits (FDs) allow you to exploit the complete potential of Section 80C to deduct Rs 1.5 lakh from your taxable income. It also ensures capital protection along with some interest returns. However, the interest income earned on the fixed deposit is taxable. Seldom do investors think about paying tax on the interest income on time. This article will cover when and how to pay income tax on FD interest income.

Interest paid

Threshold limit

 Senior citizen (Rs)Other person (Rs)
engaged in business
Co-operative engaged in the banking business50,00040,000
Primary Agricultural Credit Society50,00040,000
Co-op. Land Mortgage Bank50,00040,000
Co-op. Land Development Bank50,00040,000

How is interest income taxed?

Interest income from fixed deposits is fully taxable. Add it to your total income and get taxed at slab rates applicable to your total income. It is to be reported under the head ‘Income from Other Sources’ in your Income Tax Return. 

Banks deduct tax at source at the time of crediting interest to your account if the amount of interest is beyond Rs.40,000 for individuals other than a senior citizen (in the case of senior citizen the threshold is Rs.50,000). 

Hence 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). 

Understanding TDS

When you receive certain payments the person paying you has to deduct tax before making the payment. This tax deducted at source is called TDS, which they pay to the Central Government. 

You will receive the credit of the amount net of tax. You then have to add the gross amount to your income while reporting it in your income tax return. As against this, the credit of TDS is also provided from the total tax liability or a TDS refund is offered in case of nil tax liability. 

For example, if you earn FD interest of Rs.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. 

TDS on Recurring Deposits (RDs)

Recurrent Deposits are deposits made on a recurring basis. For example, a Rs 10,000 per month RD. Interest on RDs is completely taxable according to your tax bracket. Senior citizens, on the other hand, are exempt from tax on the interest income from RDs/FDs up to Rs 50,000 per year. TDS provisions on RDs are the same as TDS provisions on FDs. TDS is levied on RDs if the interest payable in a single bank exceeds Rs 10,000.

How to calculate tax on interest income?

Add the interest income to your total income in your Income Tax Return each year (even though, it may not be paid out). Interest income is to be reported under the head ‘Income from other sources’ while filing ITR. See which tax slab rate you fall into. 

The income tax department will adjust the TDS (which has already been deducted) against your final tax liability. 

If the bank does not deduct TDS from your interest income, the total interest income earned from your fixed deposits in a particular financial year is to be added to your total income and pay tax on it.  

It is not advisable to wait until the maturity of your FD when interest is actually received– to report the interest income. This is because the accumulated interest may push you up to a higher slab and you may end up paying more tax.

You can view the details of TDS deducted on any of your income by viewing your Form 26AS

Let’s understand this by way of an example: 

  1. Ritwik falls in the 20% tax bracket. He has 2 Fixed Deposits with a bank of Rs 1,00,000 each for a period of 3 years @ 6% interest per annum. In the first year, Ritwik’s interest income is Rs 6,000 from each of the FDs, total interest accrued is Rs 12,000 in the first year. Bank does not deduct TDS for annual FD interest below Rs 40,000. 
  2. Another example , Mr. Anurag has a fixed deposit of Rs 10 lakh @ an interest rate of 6% p.a. He receives an annual interest of Rs 60,000. The bank deducts TDS on the whole of Rs 60,000  at 10% i.e Rs.6000. The prescribed rate of TDS is 10%. 

When to pay tax on interest income?

If there is a tax liability on adding interest income to your total income, then the same is required to be paid on or before 31st March of the financial year. This is how you can pay any tax that is due. 

However, if the tax payable after the inclusion of your interest income in your total income is more than Rs.10,000 – then you are liable to pay Advance Tax. Hence the rules of quarterly payment of advance tax in instalments are to be compiled. 

Understanding TDS in relation to FDs

When does the bank not deduct TDS:

If your interest income from all FDs with a bank is less than Rs 40,000 in a year, the bank cannot deduct any TDS. The limit is Rs 50,000 in the case of a senior citizen aged 60 years and above. 

Prior to Budget 2019, the limit of TDS on interest income was Rs.10,000.

When does the bank deduct TDS @ 10%

The bank estimates your interest income for the year from all the FDs you have with the bank. There would be a 10% TDS deduction if your interest income exceeds Rs 40,000 (Rs 50,000 in the case of senior citizens). Prior to Budget 2019, the limit of TDS on interest income was Rs. 10,000.

When does the bank deduct TDS @ 20%:

In case you do not provide your PAN information to the bank, they will deduct 20% TDS. So do make sure that the bank has your PAN details.

When your overall income is less than Rs. 2.5 lakh

No TDS is deductible when your total income is less than the minimum taxable amount. Some investors may have more than Rs 40,000 in interest income in a year, but their total income (including interest income) is less than the minimum exempt income (Rs 2.5 lakh for FY 2019-20).

 When there is no tax payable by the individual, the bank cannot deduct TDS. However, in such cases, the bank will not deduct TDS only where you submit Form 15G or 15H to claim interest income without TDS.

How to ensure zero TDS deduction by the bank

The only way to make sure that no TDS is deducted by the Bank is when your total income is not subject to tax and you submit Form 15G and Form 15H to the bank before the due date. 

Submit these forms at the beginning of each financial year to avoid the whole hassle of additional TDS deduction and subsequent refund from the IT Department.

Interest from FD for senior citizens

Senior citizens receiving interest income from FDs, savings accounts and recurring deposits can avail of income tax deductions of up to Rs 50,000 annually. This is by way of an amendment vide Finance Act 2018.

 Please read out the detailed article on this here, where we have discussed provisions of section 80TTB. If the senior citizen’s interest income from all FDs with a bank is less than Rs 50,000 in a year, the bank cannot deduct any TDS. 

Income tax on fixed deposit interest for a housewife

I am a homemaker. I have invested Rs. 5 lakhs in a bank FD in which I am getting interested after tax deduction(TDS). Do I need to file my tax return? Can I submit Form 15G to the bank if I have no other income? How to get back the refund of the tax deducted?

Banks and other financial institutions deduct tax at source(TDS) before paying you the interest income on FD.

You will have to file an income tax return if your total income exceeds the basic exemption limit. If not, you will not be required to pay tax. If, however, tax is deducted from your income, you can claim a refund while filing your return. 

To receive interest without tax deduction, Form 15G and 15H can be submitted, but your income should be below the basic exemption limit of Rs 2.5 lakhs or Rs 3/5 lakhs, respectively, and the tax payable should be zero.

Form 15G is to be submitted by people below the age of 60 years, and Form 15H by people of 60 years or more.

  • If your age is 80 years or more: You can file Form 15H only if your taxable income is less than Rs 5 lakhs. 
  • If your age is 60 years or more but less than 80 years: If you are a senior citizen, you can file Form 15H only if your taxable income is less than Rs 3lakhs. 
  • If your age is less than 60 years: If you are not a senior citizen, you can file Form 15G only if your total income is not more than Rs 2.5 lakhs.

Frequently Asked Questions

What is the tax payable on FD interest?

FD interest or fixed deposit interest income gets taxed as per your income slab rates. In case you are in the lowest slab, you pay less tax. However, if you are in the highest slab, you need to pay tax in addition to the tax deducted or TDS by the bank.

Will I be able to get FD interest without TDS if my income is below the taxable limit?

You can claim FD interest in case your income is below the taxable limit by submitting Form 15G. In the case of a senior citizen, you can submit Form 15H.

When do banks or post office deduct tax or TDS?

Banks or post offices deduct tax or TDS when the aggregate interest income on all fixed deposits exceeds Rs 40,000 per financial year. The limit is Rs 50,000 in case of senior citizens.

What is the tax deduction on FD interest for senior citizens?

Senior citizens can claim a tax deduction up to Rs 50,000 on FD interest income while filing their income tax return.

What is the TDS rate on FDs?

Interest income from FDs attract a TDS of 10% and a TDS of 20% if PAN details are not provided to the bank. 

Can I claim deduction for the interest income earned from fixed deposits?

No, the Income Tax Act does not provide for any deduction on interest from FDs. 

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