Friday, January 27, 2023

Steps to Pay Income Tax on Fixed Deposit Interest Income

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Fixed Deposits are an excellent investment choice that will allow your savings to grow over time. Banks and other financiers allow you to deposit a lump sum amount in a Fixed Deposit scheme and schedule its maturity. If you lock in your lump sum rate, your deposit will accumulate interest and grow over time. 

The FD interest rates are predetermined in advance and remain unaffected by market fluctuations. A partial or whole withdrawal before maturity may be allowed according to your investment. Fixed deposits have been one of the most common and oldest investment plans in the modern financial world since the beginning of time. 

Interest on Fixed Deposits and Income Tax

Fixed deposits from banks, post offices, or corporations are fully taxable. Depending on your preference, you can pay the tax in two ways:

  • Accrual Basis

To declare the interest credit and pay the tax on it, you must declare the interest credit whether it arrived in your account or cash.

  • Cash Basis

Upon withdrawing the interest or maturing of an FD, you are required to pay the tax at that time.

Taxation on fixed deposits

Tax score

A fixed deposit interest income is added to the total income in a particular assessment year, which determines your income tax bracket. As per the income tax law, senior citizens are permitted to deduct Rs 50,000 from their income tax returns, provided their taxable income does not exceed Rs. 2,50,000.

Fixed Deposit Interest TDS

The interest income you earn from your FD interest rates is entirely taxable. If the interest income exceeds the following amounts, the bank will deduct tax at the source (TDS).

  1. Rs 40,000 if you are below the age of 60 years old
  2. Rs 50,000 if you are a senior citizen

It is important to note that the deducted TDS will appear on Form 26AS, which will lower your final tax obligations. The FD returns on a receipt basis will require you to be cautious, as you will be charged TDS on the interest accrued. So, ensure all TDS you have accrued for the time you have accrued the interest has been carried forward to the year in which you will receive it.

Alternative scenario and interest in tax-saving FDs

If the interest income from the fixed deposit is between Rs. 40,000 and Rs. 50,000 per year, the bank cannot deduct TDS if it is lower than that threshold. A bank or post office can offer 5 year tax-saving deposits that allow you to deduct your investment. It is important to note that this deduction is for the invested amount, not the interest paid. Accordingly, you can claim a deduction of up to Rs 1.5 lakh from the invested amount if you comply with this tax law. Nevertheless, any FD interest rates you earn on your deposit must be taxable.

Tax savings in other ways

The easiest way to reduce your tax liability for the financial year is by investing in tax-saving schemes. To reduce both your current tax liabilities as well as your future tax liabilities, you should try to reduce your tax liabilities when the investment matures.

It is important to note that the deducted TDS will appear on Form 26AS, which will lower your final tax obligations. The FD returns on a receipt basis will require you to be cautious, as you will be charged TDS on the interest accrued. So, ensure all TDS you have accrued for the time you have accrued the interest has been carried forward to the year in which you will receive it.

Tax payment time

By the end of the financial year, the best way to ensure your tax payments are made on your interest income is from your best FD interest rates. When a fixed deposit matures, individuals who fail to pay tax on FD interest on the accumulated money may find themselves in a higher income bracket. There is a possibility that the individual will end up paying more taxes than they should.

Conclusion

Fixed deposits, whether with banks or corporates, are a secure way to invest with low risks and enjoy guaranteed returns. Fixed deposit is the most common instrument used to protect against market risks and to take full advantage of the tax benefits provided by Section 80C.When a fixed deposit matures, individuals who fail to pay tax on FD interest on the accumulated money may find themselves in a higher income bracket. There is a possibility that the individual will end up paying more taxes than they should.

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