The fixed deposit
(FD) or term deposit is one of the most popular savings vehicles used by Indians. In an FD
, the investor invests a lump sum amount with the bank or other financial institute like an NBFC or housing finance company for fixed tenure at a predetermined interest rate. At the end of the tenure of the FD, the investor receives the amount that was invested along with the compound interest.
An FD comes with assured returns (the interest rate is fixed at the time of opening the FD account) unlike market-linked investments. Even if interest rates fall after you open an FD, your FD will continue to receive same interest rate that was decided at the start. For interest payout you have various options. You can opt for a monthly or quarterly pay-out of interest or the reinvestment option.
Why should you invest in FD?
FDs are among the safest and most popular investment options available to risk averse investors, i.e., those with low risk appetite and want to steer clear of volatile investments like equity. FDs allow you to manage your financial risks and help fulfil your money goals. FDs can be used to achieve financial goals like securing your child's future, children's education and marriage, or as a hedge against unexpected expenses. FDs can also be used to build a corpus for any other life goals like retirement over a period of time.
Is FD interest taxable?
As per the Income Tax Act, 1961, interest earned on FDs is treated as 'income from other sources' and therefore it is fully taxable. It is to be reported under the head 'Income from Other Sources' in your ITR. The FD interest earned is included in an individual's gross annual income, and then the total tax liability for the year is calculated.
If the bank does not deduct TDS from your interest income, the total interest income earned from your fixed deposits in a particular financial year is to be added to your total income and pay tax on it.
The tax on FD interest is deducted as TDS at the time of credit of annual interest. Banks deduct tax at source at the time of crediting the interest to your account if the interest amount is above Rs 40,000 for individuals (for senior citizens this limit is Rs 50,000).
Do keep in mind that TDS is deducted at the time of credit of interest and not when the FD matures. So, if you have an FD for 3 years - banks will deduct TDS at the end of each year.
For an example, if you earn FD interest of Rs 100, the bank will deduct 10% TDS (Rs10) and deposit it to the government. While reporting the interest income in ITR, you have to report the entire interest earned of Rs 100 and claim the TDS deducted by the bank of Rs 10 as TDS refund or tax credit from the outstanding liability, as the case may be.
Special FD interest rates for senior citizen FD
Most banks and NBFCs offer an additional interest rate of up to 50 bps for senior citizens over the fixed deposit interest rates offered to regular individuals. However, these higher interest rates are only offered to resident senior citizen FD depositors. Some banks and NBFCs also offer additional interest rates of 20-30 bps, over and above the additional FD rates offered to senior citizens. However, the additional rates offered over and above the senior citizen FD interest rates are provided under special FD schemes for pre-determined tenures.