As far as India is concerned, a large number of individuals tend to prefer investing in fixed deposits than other forms of investments. Such immense popularity of FDs can be attributed to their relatively simple nature and their ability to provide stable returns irrespective of the economic or market conditions. That’s not all. You get the freedom to choose the type of FD that you wish to invest in as well. Cumulative FDs, non-cumulative FDs, and tax saving FDs are a few of the most popular choices.
Now, since a fixed deposit is basically a return generating investment, there’s also the concept of taxation that you would have to account for. Continue reading to find out if FDs are taxable on maturity.
Are Fixed Deposits Taxable on Maturity?
According to the Income Tax Act, 1961, the interest that you earn on a fixed deposit is fully taxable and is listed under the head ‘Income From Other Sources”. The interest income that you earn from an FD during a financial year is added to your total income for that year and is taxed at the slab rate applicable to you.
So for instance, if the income tax slab rate that’s applicable to you is 10%, then the FD interest would be taxed at the rate of 10%. Here’s an example that can help you understand just how taxation on fixed deposits works.
Let’s say that you open a cumulative fixed deposit, where you invest a sum of about Rs. 10 Lakhs. Assume that the rate of interest that the institution offers is around 7% per annum and the tenure of investment is 5 years. In this case, at the end of the 5-year tenure, you would stand to receive about Rs. 14,14,778, which includes an interest income of Rs. 4,14,778.
Now, since this interest income is fully taxable, it will be added to your total income and be taxed at the slab rate applicable to you. Let’s assume that the income tax slab rate applicable to you is 20%. This would mean that the FD interest income of about Rs. 4,14,778 would be taxed at 20%, which comes to about Rs. 82,955.
After accounting for the tax, the final profit that you’re left with from your fixed deposit investment would be Rs. 3,31,823 (Rs. 4,14,778 – Rs. 82,955).
Is There a Way To Avoid Taxation on Fixed Deposits?
Yes. There is a way through which you can avoid taxation on your fixed deposit investment. For instance, if your total income, including the FD interest, during a financial year is less than the basic exemption limit of Rs. 2,50,000, you won’t have to pay any tax on your FD interest.
But what if your total income is more than the basic exemption limit? In that case, you will have to mandatorily pay tax on your FD interest. That said, you can reduce the impact of taxation by investing in a tax saving FD. Wondering what it is? Here’s something that can provide you some much needed clarity.
What Is a Tax Saving FD and How Can It Help You Save Tax?
Several banking institutions in India offer a special kind of a fixed deposit scheme known as a tax saving FD.
A tax saving FD is very similar to regular fixed deposits except for the fact that it comes with a mandatory lock-in period of 5 years. Also, the maximum amount of investment that you can make in such an FD scheme in a financial year is limited to Rs. 1.5 Lakhs.
Apart from these differences, a tax saving FD comes with a major advantage which other fixed deposit schemes don’t enjoy. According to section 80C of the Income Tax Act, 1961, the amount of investment that you make in such a scheme during a financial year can be claimed as a deduction from your total taxable income for that year. The maximum amount of deduction that you can claim is limited to Rs. 1.5 Lakhs in a financial year.
By allowing you to deduct a sum of up to Rs. 1.5 Lakhs, tax saving FDs can help you significantly lower your tax liability.
If you’re someone who is apprehensive of investing in a fixed deposit due to the taxation aspect, a tax saving FD may just be the right option for you. You not only get to enjoy stable returns on your investment, but can also lower your tax liability in the process. By fully utilising the maximum deduction of Rs. 1.5 Lakhs offered by a tax saving FD, you can reduce your tax by up to Rs. 46,800.