Taxation on Tax Saving Fixed Deposit After Maturity: A Guide

Investing in a tax-saving fixed deposit (FD) is a popular way for individuals to earn interest income while benefitting from tax deductions. This article will cover the taxation implications of such deposits, particularly after they mature. Understanding these rules is essential to avoid unnecessary tax liabilities and to utilize the full benefit of tax deductions.

Exemption on Principal Amount During Lock-in Period

When an individual invests in a tax-saving fixed deposit, the primary motive is to avail tax deductions on the principal amount. Notably, the principal amount remains tax-free during the lock-in period, which is typically 5 years for such deposits. However, when the deposit matures, the interest earned thereon becomes subject to tax, subject to certain conditions.

Interest Income and Total Income Considerations

The interest earned on a tax-saving fixed deposit is taxable only if the total income, including the interest from this deposit, exceeds the specified tax threshold limit. In other words, if the total income from all sources for the financial year does not cross the threshold, you remain tax-free even on the interest earned.

Year-on-Year Income Taxation

It is important to note that banks may accrue income on an ongoing basis. This means that the interest income earned each year has to be considered as part of your total income for taxation purposes. This practice helps in mitigating the tax liability at the end of the financial year when the deposit matures.

Withdrawals During the Lock-in Period

If an individual withdraws any part of the tax-saving fixed deposit before the completion of the 5-year lock-in period, both the principal amount and the interest earned till the withdrawal date become taxable. This is a crucial point to consider before making any premature withdrawals, as it can significantly impact the overall tax liability.

Tax Rate and Application for Non-Tax Deduction

The tax rate applicable to the interest income on tax-saving fixed deposits varies based on the total income and the tax slab of the individual. For example, if your total income falls within the Rs. 250,000 to Rs. 500,000 slab for the Financial Year 2018-19, your income is taxable at a rate of 5%. Congratulations, as the interest income from the fixed deposit will also be taxed at this rate.

Individuals can apply to the banks for non-deduction of tax by filling out Form 15G. This form certifies that the individual’s income for the upcoming financial year will be lower than the taxable income, thereby ensuring that no tax is deducted from the fixed deposit interest in advance.

No Tax on Maturity Proceeds

It's important to clarify that the maturity amount itself is not subject to tax. However, the interest earned on the deposit constitutes part of your taxable income. If you have multiple tax-saving FDs, the interest earned from all such deposits needs to be combined and included in your total income for calculating the tax liability.

Taxation for Individuals and Companies

For individuals, the tax on interest income from a tax-saving fixed deposit is charged according to the applicable slab rate. For companies or firms, a tax rate of 25% or 30% (plus applicable cess) applies.

Direct Source Deduction (TDS) Post Maturity

Post the maturity of a fixed deposit, tax is deducted at the source (TDS) on the interest generated from the deposit. This process ensures compliance with tax laws and helps in avoiding backdated tax liabilities.

Interest Income as TDS

In India, TDS is levied on the interest generated from fixed deposits. This means that the bank withholds a certain percentage of the interest earned as tax and remits it to the government. This form of tax collection is designed to prevent evasion and ensures timely payment of taxes.

Practical Implications and ITR Filling

When you receive the maturity amount, you need to consider the tax implications. The interest earned up to the maturity is subject to TDS, which is reported to the Income Tax Department (ITR). While filling the Income Tax Return (ITR), you must adjust the TDS amount to determine your actual tax liability for that financial year.

Tax Slab Adjustment

If the bank has deducted a lesser amount of TDS than your actual tax liability, you will need to deposit the additional amount mentioned in the TDS certificate. Conversely, if the bank has over-deducted TDS, you will receive a refund. To manage this process effectively, compare the total interest earned with the TDS amount reported on your Form 16 and adjust your tax payments accordingly.

Conclusion

To conclude, while investing in a tax-saving fixed deposit offers excellent tax benefits, it's crucial to understand the tax implications at maturity. By keeping track of the interest earned, ensuring correct TDS deductions, and applying for non-deduction of tax when appropriate, individuals can optimize their tax benefits and avoid unnecessary tax liabilities. Always consult with a financial advisor to ensure compliance with tax laws and to maximize the benefits of your investments.