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  • Category: Banking

    Bank fixed deposits and income tax

    How to minimize income taxes on bank fixed deposits? How is income tax on fixed deposit interests levied? Learn how to invest in fixed deposits for maximum returns.

    I heard if we earn money on fixed deposit more then Rs. 10,000 thousand bank will deduct the extra money. If bank deduct the money how we can get back the money. What is the procedure. Is it good to invest Rs. 100000 in fixed deposit or better to invest Rs. 50000 in two banks. How income tax is related to bank fixed deposits?
  • #93070
    If you do not come within the income tax slab, you will not have to pay any taxes on your fixed deposit incomes. Just remember to furnish Form 15G (15H for senior citizens) at the beginning of each financial year (beginning of April each year) and the bank will not deduct any TDS (Tax Deducted at Source). However if you fail to furnish 15G the bank will deduct 20% of the interest as TDS.

    If you fail to submit 15G and the bank deducts TDS, you can still get it back. The bank will issue you a TDS certificate and you have to file Income Tax Return to get the money back.

    If you fall in the income tax brackets, splitting your fixed deposits in two or more banks does not actually help. It is now mandatory to furnish your PAN for fixed deposits as per RBI guidelines, so the IT department can easily find out where you have placed your fixed deposits. The interest income from fixed deposits is taxable and you have to quote the interest income whiling filing IT return. Remember, if you do not show your FD interest income in the IT return, it is illegal and you can face legal consequences for doing so.

    However, it is always advisable to split your fixed deposits for a different reason altogether. If you invest in a single bank, make smaller deposits rather than a huge one. That is to say, you can have 4 units of Rs. 25,000 or 5 units of Rs. 20,000 instead of having 1 unit of Rs. 1,00,000. The reason is, if you suddenly need to withdraw your fixed deposits, you can take 1 or 2 units out for which there will be a penalty deduction (usually 1%). The rest of the units can continue to earn interest in the same rate.

    It can be theoretically a good idea to split your fixed deposits in multiple banks in multiple schemes to take full advantages of the best fixed deposit schemes and interest rates available in the market. However in practical life most of us may find it difficult to go to multiple banks, open several accounts, manage several documents, and include each and everything while filing IT return. Also, the difference between interest rates of different banks are very nominal so you should consider whether you can take up all those troubles to open different FD accounts in different banks. Personally, I prefer to put my fixed deposits in 1-2 banks, but split them in low amount units like Rs. 20,000 or Rs. 25,000.

    Kumaraditya Sarkar

  • #93097
    An individual can earn income from various sources which is classified in five heads as per the Income Tax Act, 1961. They are:
    1. Income from Salaries (Salary from employer)
    2. Income from House property (Rental Income)
    3. Profit and Gain from Business and Profession (Any business and professionals like doctors, lawyers, chartered accountants, etc.)
    4. Capital Gains (long and short term)
    5. Income from Other Sources (interest, dividend, lottery, horse race or any income not covered above in other 4 heads)

    Now the interest income on fixed deposit falls in the fifth category other sources. For previous financial year 2011-12 interest on savings bank account has been exempted from tax if upto Rs.10,000. But any other interest other than savings bank is taxable, hence the bank can deduct TDS (tax deducted at source) on the FD interest even if it is less than Rs.10,000.

    It is possible to stop bank from deducting tax on interest by submitting declaration in Form 15H. this from shall be submitted to bank only if your income is below taxable limit i.e. Rs. 1,90,000 (for males below 60 years).
    However if you fall in taxable slab of income then there is no need to give Form 15H to bank as the interest income is taxable and if no tax is deducted then you will have to deposit the tax on your own by computing it.
    For example,
    Your total income for the year is:
    Salary income Rs.4,80,000
    Income from other sources Rs.20,000 (FD interest)
    Total Income Rs.5,00,000

    Deduction under section 80C: Rs.1,00,000
    Net taxable income Rs.4,00,000 (5,00,000 - 1,00,000)

    Tax on above would come to Rs.21,630
    Now if TDS deducted on salary is Rs.19,630 and TDS deducted by bank on FD interest is Rs.2,000 (assuming you have declared your interest income to employer)
    Total tax deducted being Rs.21,630.

    Here you will not have to do anything except filing your return. No need to deposit any other tax as such. In case your return is not yet filed then you can file it by 31st of August, 2012 as the date for filing has been extended and claim the TDS if deducted on interest income.

    But if the bank has not deducted TDS on the interest then you will have to deposit Rs.2,000 on your own or else ask your employer to deduct the same from your salary.

    Now assuming that your that your total income is Rs.1,80,000 (including interest income of Rs. 20,000)and the bank has deducted TDS on the same @10% i.e. Rs.2,000. In this case you can claim refund of Rs.2,000 from Income Tax Department by filing you income tax return as you do not fall in the taxable category.
    Alternatively you could submit Form 15H to the bank in the beginning of the year so that they do not deduct any tax on the interest.

    In my opinion investing Rs.1,00,000 in FD is not a good option and also by breaking the sum by depositing in two banks won't help as already told you that income from interest is taxable and you will have to deposit tax on the same even if bank does not deduct any tax on the same. It is better that the bank deduct the tax and give you the certificate for same or else you will have to follow the procedure of computing tax and then depositing it.

    If you have over or around Rs.1,00,000 to invest then it is better to diversify it in more than one options rather than depositing the whole in FD.

    I do not consider FD as a good option of investment. Return on FD at present is next to nil.

    Go for mutual funds and other options with half sum only in fixed deposit.

  • #93150
    hello kumaraditya
    as you told if i am not coming under tax slab then why i have to submit form 15G. I will divide Rs.100000 to four parts as Rs.25000 each. If i invest one time huge amount i will get more interest them bank will deduct the money, if i do fixed deposits in small investments them how bank will calculate the earning and deduct the money.

  • #95635
    As per Income Tax of India guidelines, every Bank has to deduct TDS on Interest Income of clients Bank Deposits if the interest payout is Rs.10000/- and above per annum. To avoid TDS on your interest amount on Fixed Deposits, you have to give duly filled and signed form 15G, in case you are below 65 years old or 15H, if you are above 65 years old. 15G and 15H form is a declaration by the client that his total Income including Salary, Bank Deposit Interest, House property, Business and other Income for the Financial Year will not exceed Taxable income threshold and his tax liability for the Financial Year will be Nil. If these forms are not provided to Banks, TDS will be deducted as per the prescribed rate.
    In your case, if your total Income for the year from Salaries, Hose Property, Business income, Bank interest or any other sources does not exceeds taxable Income threshold and your income tax liability is nil, then you need not worry about your Deposits in a single Bank. Only thing is to produce 15G or 15H to your bank. If already deducted earlier, you demand TDS certificate from your Bank and you can claim the same to Income Tax Department by filling return for refund of TDS amount.

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