Is bank FD interest income taxed? Your complete guide on how to file ITR for fixed deposit income

Tax on FD: Fixed deposits or FD is considered one of the safest investment options and some banks provide a facility of tax saving FDs which comes with a dual advantage of saving tax as well as building wealth for the future. If you have also invested money in tax-saving FD, you will be able to claim a deduction under section 80C of up to Rs 1.5 lakh. Note, tax deductions can only be claimed on tax-saving FD schemes.

What is tax saving FDs?

As the name suggests, a tax-saving FD account is a type of FD account that provides a tax deduction under Section 80C of the Income Tax Act of 1961.

How is the tax applied on FDs?

The tax-saving FD schemes have a lock-in period of five years and the deposit amount of up to Rs 1.5 lakh each financial year qualifies for tax deduction under Section 80C of the Income Tax Act. However, the interest earned from the FD is fully taxable for the general public.

To put things into perspective, “if an investor opens an FD account by investing Rs 5 lakh, they can claim a Rs 1,50,000 deduction under Section 80C on the Rs 5 lakh deposit. However, the interest earned on the FD will be taxable to the general public,” said tax expert Sunil Garg.

Garg added that senior citizens can file a deduction of Rs 50,000, which comes under Section 80TTB, on interest on their FD.

How is FD interest income taxed?

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 a senior citizen the threshold is Rs 50,000).

Also read: Income tax: What are the 6 common tax-saving mistakes that can be avoided 

How to calculate tax on FD interest income?

Add interest income to total income in the Income Tax Return at the end of each fiscal year (even if it is not paid out). When filing an ITR, interest income should be documented under the heading 'Income from other sources'. Determine the tax bracket one belongs to.

The income tax department will apply the previously deducted Tax Deducted at Source (TDS) to the ultimate tax liability.

If the bank does not deduct TDS from interest income, the total interest income produced from fixed deposits in a given fiscal year must be added to total income and taxed accordingly.  

How to claim deductions on FD?

Taxpayers can claim a deduction under section 80C of Rs 1.5 lakh on the FD deposit. No deductions are available for income earned from FD for the general public

On the other hand, senior citizens can claim a deduction under 80C on FD deposits and can avail of a deduction on interest earned from FD of up to Rs 50,000 under section 80TTB of the Income Tax Act.

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