Aditi Goyal, a retired private sector employee, got a rude shock when she received her bank account statement. Her bank had deducted a TDS (tax deducted at source) at the rate of 10 per cent on her fixed deposit interest income.
- Banks deduct TDS if interest on FDs more than Rs 10,000 in a year
- Interest on bank fixed deposit is fully taxable
- Investors can submit Form 15G or 15H to avoid TDS
Like many, she had parked all her retirement savings of Rs 25 lakh into a bank fixed deposit which was offering her interest at the rate of 9 per cent per annum. She was expecting to receive Rs 2,25,000 lakh as interest income for the year but received only Rs 2.02 lakh as the bank deducted Rs 22,500 (10 per cent of Rs 2,25000) as TDS.
As she doesn't have any other major sources of income, she was not liable to pay any tax. For senior citizens (above 60 years of age), income of Rs 3 lakh is exempt from tax.
Interest on bank fixed deposit is fully taxable. Banks are liable to deduct TDS at the rate of 10 per cent on the interest earned, if the interest income for the year is more than Rs 10,000. However, if the depositor doesn't furnish permanent account number (PAN) with the bank, the lender will deduct TDS at the rate of 20 per cent.
Now, she will have to claim the TDS deducted by the bank by filing the income tax return and will have to wait for the refunds.
So if you want to avoid getting into a situation like this, use following measures to avoid TDS.
Submit Form 15G or 15H
To prevent the bank from deducting TDS, depositors can submit Form 15G /15H with the bank. Form 15G/15H are self-declaration forms by an individual stating that his or her income is less than the taxable limit. Form 15G is for individuals aged below 60 years and 15H is for individuals above 60 years of age. Depositors whose total interest income for the year is below the exemption limit and total tax payable for the year is nil, can submit form 15G /15H to avoid TDS deduction. If you forget to submit these forms at the time of investing in fixed deposits, you can submit them as soon as possible as TDS is generally deducted on a quarterly basis.
Distribute your investments across banks
You can also distribute your fixed deposits across banks to avoid TDS. Remember, as per the tax norms, if the interest on fixed deposits across branches of the same bank is more than Rs 10,000, the lender is liable to deduct TDS. So you will have to spread your investments across banks.
Time Your investments
If possible, you can also time the investment in such a way that interest for the year doesn't exceed Rs 10,000 in a particular financial year. For example, a 12-month fixed deposit of Rs 1 lakh at 9 per cent could be started in October as financial year closes on 31st March. This way, the interest would split in two financial years and hence TDS will be avoided.