Taxation in Fixed Deposits (FD)

We feel safe investing in Fixed Deposits (FDs). The assumption is that they’re no-risk and completely safe. The truth is, not all FDs are the same.

Many times, you will notice the certain banks offer higher interest rates than others. Many investors assume that since it is an FD, the risk level is the same. This isn’t true.

A bank offering a higher interest rate for its FDs would usually have a higher level of risk.

FDs earn different rates of return for different periods of time. Usually, for a shorter duration, the interest rate is lower while it is higher for longer durations.

Every bank/financial institution will display a list of all the tenures and the interest rates they are offering for that period.

Another thing to keep in mind is that banks want you to keep the money with them for the duration you have promised.

So, some FDs have a lock-in while others don’t but they have a penalty if you withdraw early.

Plan your investment carefully. If you have a need in the future, make sure you invest in an FD accordingly.

Another strategy you could use is having multiple smaller FDs instead of having one large FD.

That way, even if you have to break the FD for a smaller amount, you will break only one of the many FDs and you will pay a smaller penalty.

When you start an FD, you will be promised a certain amount in interest. Most FDs allow you to choose when you receive the interest. It could vary from as frequently as every day to months, to a couple of months, to years, to even after the maturity of the FD.

Now, one isn’t necessarily better than the other. It depends on the individual FD and the rates being offered.  Let’s not forget your own need. If you need an income on a regular basis, opting for an FD with a maturity at the end of the entire period isn’t the best decision.

Also, another factor you need to consider is taxation. See how it fits with your overall earnings and plan accordingly.

Taxes are automatically deducted in case of FDs.

When the total interest from FDs in a bank exceeds the amount of Rs 40,000 per year, you have to pay a tax of 10% flat. This amount is Rs 50,000 if the investor is a senior citizen.

By that, it doesn’t mean you have to pay - the bank will automatically cut that part of tax and then pay you the interest.

However, if your total income is less than Rs 2.50 lakh per annum, then, you are not required to pay any tax.

In that case, you need to inform the bank of the same before the deadline by submitting a form called 15G/H.

If in case your PAN card isn’t linked to your FD, the bank will deduct 20% tax instead of 10%.

The 10% TDS is only the TDS part. The income tax needs to be paid by you while filling tax according to your tax slab also.

Banks usually offer a slightly higher rate of interest to senior citizens.

A senior citizen is anyone above the age of 60 years. For shorter tenures (like FD for 1 week or 1 month), the interest rate offered is not that much more. But for longer durations, the interest rate difference for senior citizens is significantly higher.