Understand Taxes On Fixed Deposits

  • Added:
    May 02, 2014
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Understand Taxes On Fixed Deposits Photo by Aishwarya Mahurkar

Returns on a fixed deposit aren’t tax free. You need to be aware of that to understand how income tax will affect you when you invest in this financial product. Income tax rules and regulations state that you will pay tax on the fixed deposit interest. Though it is not exactly a necessary part of the financial product, you can be smart about it and try avoiding it. How exactly can you do that? Start by studying:

The rules and regulations:

• Returns on fixed deposits  come in the form of interest, which can be deposited into your savings account on a monthly, quarterly or annual basis.

• If you earn interest amounting to more than Rs. 10,000 per year, the tax will be deducted at the source. You can reclaim the deducted amount by submitting the right documents along with your income tax returns.

• Even if your interest is less than Rs. 10,000, you will need to add the interest into the taxable income when you file your income tax returns.

These are basic taxation rules for fixed deposits, whose application may vary on a case by case basis. Primarily, you will use two strategies for income tax. So, here are few strategies that you can use, if applicable. 

• Announce your income

If you can demonstrate that you have no taxable income, you can submit the 15G form that clarifies this. With the submission of this form, you will establish that you do not have any taxable income. Therefore, the deducted amount will be returned to your bank account after the income tax return processing is completed.

• Distribute Fixed deposits

You must be strategic while making fixed deposit investments . There are three ways that you can distribute your FDs. Though you can use them together, you need to plan your fixed deposit investments accurately to benefit from them:

o If you invest the amount in a particular organization and the interest on the fixed deposit scheme does not exceed Rs. 10,000, then the organization will not deduct any TDS (Tax Deducted at Source). Then you are at liberty to show your income tax returns in such a way that you do not need to pay any income tax.

o If you time your investments to avoid an interest of Rs. 10,000 in a single financial year, then you can show your liabilities against it to nullify your due income tax for your investments.

o If you are paying your income tax as HUF, then you can create separate fixed deposit accounts - on individual names – so that you can avoid getting Rs. 10,000 in the name of your HUF identity while investing more funds into this financial tool.  

Combine all these tools and strategies for your financial planning and enjoy the rewards.

Author's Profile

An experienced writer on finance topics, the author articulates of investment choices such as Returns on fixed deposits & recurring deposit schemes. She writes about a variety of topics including the benefits of recurring & fixed deposit investments and how to make the right investment choice.

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