The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "There are only two lasting bequests we can give our children... one is roots, the other wings." ~ Steven Covey

Pay Tax On Your FD Interest. Or Pay The Penalty.

If you are not paying tax on your interest income, you can 'surely' expect a notice from the Income Tax Department.

Contrary to popular perception, every rupee of the 'interest' that you earn is taxable (except a few exceptions).

Listed below are the popular products where you often keep or invest your surplus money.

- Bank Savings Account
- Post Office Savings Account

- Bank Fixed Deposits

- Company Fixed Deposits
- Post Office Time Deposits

- Bank Recurring Deposits

- Post Office Recurring Deposits

- Senior Citizen Savings Scheme

- National Saving Certificate
- Public Provident Fund
- Kisan Vikas Patra

- Tax Free Bonds

- Infrastructure Bonds

There are three aspects to this taxation viz. Tax Benefit u/s 80C, Tax Payable on Interest and Tax Deducted at Source.

All three are totally different and hence, you must understand the difference. Else, you may make a mistake and (unnecessarily) invite the Income Tax Department's notice.


A. Tax Benefit u/s 80C

Simply remember one point... this benefit is for the 'investment' portion only; it does not cover the interest earned from that investment.

Therefore, if any investment is covered under section 80C e.g. the 5-year Tax Saving Bank Fixed Deposit (or the Infrastructure Bonds you had invested in the earlier years to claim tax deduction), it only reduces your taxable income for the particular financial year in which you make the investment. 

That's all. Your tax benefit ends there. The interest earned every year thereafter on the said investment is, however, FULLY TAXABLE.

In other words, don't confuse between the tax rules on the 'original investment' and the tax rules on the 'interest earned' from that particular investment.

tax-on-interest-income
Pay tax on your interest or your IT Assessing Officer will nab you.

B. Tax Payable on Interest

You have to simply remember the following three points:
1. Only the interest income from PPF and Tax Free Bonds is NOT TAXABLE.

2. Interest income from Bank / Post Office Savings Account is TAX FREE only up to Rs.10,000. Additional amount is fully taxable as per your income tax slab rate

IMPORTANT: FD and RD interest is not to be considered as part of this relief of Rs.10,000. Every rupee of FD / RD interest is fully taxable.

3. Interest income from ALL OTHER investments is FULLY TAXABLE as per your income tax slab rate. 

IMPORTANT: Any investment made in the name of spouse or children is ALSO FULLY taxable, under clubbing of income provisions.


C. Tax Deducted at Source

The total tax liability, that you have to pay on your interest income, is as mentioned in Point B above.

However, 'when' you have to pay this tax is a different matter altogether:

Normally, this is a two-stage process.

One, when you actually receive the interest. So, for example when your FD matures, a specified percentage (normally 10%) of the interest is deducted by the bank and paid to the Govt. as tax on your behalf. This is known as Tax Deducted at Source. This is the 1st stage of tax payment. As you may know, the responsibility of paying this tax is with the entity paying you the interest.

TDS deducted is a fixed percentage, irrespective of the investor's tax profile.

Therefore, it is quite possible that the specified percentage deducted (say 10%) may be less than your actual tax liability. If you fall under the 30% tax bracket, you have to pay additional 20% as tax. That is why, I had once cautioned that TDS is not the end of your tax trauma.

This additional tax (= the difference between your actual liability and the tax already deducted), if any, is payable on the Advance Tax Dates (i.e. 15th of Sept, Dec and Mar) or at the time of filing the returns, as the case may be. This is the 2nd stage of tax payment. This payment of full and final tax is your responsibility.

As regards deduction of tax at source, you should note that
a. TDS is NOT deducted on the Bank Savings Account and various Small Saving Schemes i.e. Savings Account, NSC, KVP, PO Time Deposit and PO RD (except Senior Citizen Scheme)
b. TDS @10% is deducted on Bank RD and FD, Infrastructure Bonds and Senior Citizen Savings Scheme if the interest income during the year exceeds Rs.10,000.
c. TDS @10% is deducted on Company Fixed Deposit if the interest income during the year exceeds Rs.5,000.
d. Of course, as PPF and Tax Free Bonds interest income is tax free, the question of TDS does not arise.

In case you are not aware, Form 26AS enables you to verify the details of the TDS deducted on your various investments.

Concluding, it is in your 'interest' to disclose all your interest earnings and pay appropriate tax on the same. Given the checks and balances built in, it is now quite easy for the Income Tax Department to detect any hidden earnings and consequently catch you.

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