Fixed deposits are one of the most prevalent investment options for Indians. In a fixed deposit, funds are locked in for a period till maturity, and in return, the bank pays interest at a fixed rate on these deposits. The interest rates for these deposits vary based on the tenure of the fixed deposit. It is very convenient to open an online fixed deposit today using internet banking and net banking.
A fixed deposit account can be used as an effective way to earn a monthly income. Senior citizens can use FD to earn a higher interest on their savings. By choosing the reinvestment of interest option, the FD account can also be used to save for a particular short-term goal. But did you know that a fixed deposit account can be used to save tax?
Saving tax on FD: The interest earned on a fixed deposit is taxable. This means you add it to your taxable income and pay tax on it based on the slab in which you fall. However, there are a few provisions which you can use to save tax on your fixed deposit account.
Section 80C: Section 80C of the Income Tax Act provides deductions for investments made by the individual. Banks and the post office offer 5-year tax-saving fixed deposits. The funds here are locked in for a period of 5 years and the interest rate on these deposits is fixed. If you invest in these fixed deposits, you can get a deduction up to INR 1,50,000 depending on the amount you invest. Depending on the tax slab you fall in, the saving in tax will vary. However, the interest earned on this fixed deposit is taxable. There is no exemption or deduction for this interest.
Section 80TTB: To provide benefits to senior citizens, the Budget in 2018 introduced Section 80TTB, which provides a deduction of INR 50,000 to senior citizens for bank interest. The section does not define what bank interest is. This means it includes interest from fixed deposits, recurring deposits and savings account. A senior citizen can use the deduction under this section to get a benefit on fixed deposit interest.
Tax deduction provisions: A bank is liable to deduct tax on fixed deposit interest if the total income in a year exceeds INR 10,000. However, in the Budget 2019, the limit for deducting tax on interest income was hiked from INR 10,000 to INR 40,000. This means the total interest income will need to exceed INR 40,000 for the tax to be deducted.
However, if your interest income exceeds this limit but your income doesn’t exceed any tax limit, then you can file Form 15G/15H and submit it to your bank. If you have an online fixed deposit, you can submit these forms online to the bank as well. Once you submit these forms to the bank, the bank will not deduct tax on your fixed deposit incomes. This way, you can pay tax once you assess your income at the time of filing the income tax return.
A fixed deposit is a terrific investment option. If you consider the tax savings from the investment, you can plan your investments better and ensure you take the benefit of these provisions. There are facilities to open fixed deposits through digital banking apps as well.
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