Fixed Deposits (FDs) are one of the most favorite investment instruments in India. FD is defined as a financial investment where money is invested for a fixed period of time and on the pre-agreed interest rate.
Types of FD schemes
These FD schemes can be picked by the investor depending on its need and suitability.
- Regular FD: In this type of FD scheme, the time period is fixed from 1 week to 10 years. The interest rate of each period is pre-determined.
- Tax saving FD: This type of FD scheme is for the investors who want to save income tax. There is compulsory five years tenure and cannot be withdrawn before the completion of this period.
- Special FD: The fund can be invested for a special period like 333, 399 or 555 days, and rate of interest is higher.
- Recurring Deposit (RD) scheme: It is another popular investment option available to the investors today. Under this scheme, an investor can regularly deposit a fixed amount every month for a fixed time period and at a pre-decided interest rate. The amount keeps on growing every month towards the maturity period.
- Floating FD: An investor can opt for a market-based interest rate. The rate of interest is renewed automatically with the change in the base rate.
TDS in relation to Fixed Deposits
- When TDS is not deducted by the bank: If your interest income from all Fixed Deposits with a bank is less than Rs. 10,000 in a year, the bank does not deduct any TDS under section 80c.
- When TDS deducts @ 10%: Bank deducts TDS @ 10% plus 3% education cess from interest income when it exceeds Rs. 10,000 in a year.
- No TDS is deducted when total income is less than Rs. 2.5lakhs: In case, of housewives or senior citizens, it is possible that their interest income in a year is more than Rs 10,000 but their Total Income (including interest income) is less than the minimum exempted income (Rs. 2,50,000 for the financial year 2016-17). In this scenario, no tax is payable by the individual and no TDS should be deducted by the bank.
Form 15G & Form 15H are self-declaration forms to be furnished by the assessee to their respective Bank for No Deduction or Lower Deduction of TDS on Interest on Fixed Deposit.
Under Section 194A of Income Tax Act, 1961 all Banks and Financial Institutions are directed deduct and file TDS on all Interest Payments exceeding Rs.10,000 in any Financial Year. The tax deducted is directly paid to the Government on the behalf of the customer itself.
Mandatory conditions for Form 15G
- You must be an individual or HUF.
- You should be less than 60 years old.
- You must be a Resident Indian.
- Calculation of tax on your Total Income should be Nil.
- The total interest income for the year should be less than the exemption limit of that year, i.e. is Rs. 2,50,000.
Mandatory conditions for Form 15H
- You must be an individual.
- You must be a Resident Indian.
- You should have crossed 60 years or above during that year for which form is submitted.
- Tax calculated on your Total Income should be Nil.
Some more features regarding these forms as follows:
- TDS is not applicable on Savings Account interest even if total interest amount is more than Rs.10,000.
- Form 15G/15H is submitted in a pair, one copy is kept by the bank and another copy is sent to the Income tax department by the bank.
- As per the guidelines of RBI, banks have to issue an acknowledgment receipt of these forms.
Save TDS on FDs
Submits Form 15G, stating that no taxable income is earned so do not deduct any TDS on interest earned.For senior citizens, submit form 15H to avoid TDS deduction.
Distributing the FD amount
By splitting the deposits into separate banks in a way that interest earned do not exceed the limit of Rs. 10,000.
Timing the FD
TDS can be saved by timing Fixed Deposits such that interest earned on FDs in a financial year does not exceed Rs. 10,000.For example, a 12-month fixed deposit of Rs. 1lakh at 10.5% started in September and closes on 31st March. This way, the interest would split in two financial years, and TDS will be avoided.
Splitting the FD
An individual can start one FD under personal bank account and another under an HUF account to avoid TDS.
- Banks also deduct tax on the accrued interest, in the case of a fixed deposit for 3 years. TDS will be deducted each year on the interest due.
- 15H/15G forms are submitted at the start of the financial year. Therefore, the declaration is made on the estimated total income.
Drawbacks of tax saving in FDs
- The negative point is the tax on interest earned. There are many options available for investments which are not taxable at any point.
- If the investor forgets to fill Form 15H/15G then the bank will deduct the TDS itself. People under higher tax slab may interest 20% to 30%.
- The lock period of tax saving FD is 5years, which is greater than the ELSS lock period.