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Hardik Parikh | Answer |Ask -Follow

Tax, Mutual Fund Expert - Answered on Jul 26, 2023

Hardik Parikh is a chartered accountant with over 15 years of experience in taxation, accounting and finance.
He also holds an MBA degree from IIM-Indore.
Hardik, who began his career as an equity research analyst, founded his own advisory firm, Hardik Parikh Associates LLP, which provides a variety of financial services to clients.
He is committed to sharing his knowledge and helping others learn more about finance. He also speaks about valuation at different forums, such as study groups of the Western India Regional Council of Chartered Accountants.... more

Asked by Anonymous - Jul 26, 2023Hindi

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My interest on FD has been taxed at 10% TDS already . Why does it have to be taxed again during the return filing . Example of interest is 2 lakhs and TDS is 20000.

Ans: Hello there,

I understand your concern about the double taxation on your Fixed Deposit (FD) interest. Let me clarify this for you.

The Tax Deducted at Source (TDS) is a means of collecting income tax in India and is governed under the Indian Income Tax Act of 1961. When it comes to FDs, banks deduct TDS when your interest income exceeds a certain threshold in a financial year. As of now, this limit is Rs. 40,000 for non-senior citizens and Rs. 50,000 for senior citizens.

Now, coming to your question, the TDS deducted by the bank is not the final tax. It's just a part of the total income tax you're liable to pay for the year. The bank deducts TDS at 10% (if PAN is provided) on the interest earned, but your final tax liability could be at 5%, 20%, or 30% depending on your total income for the year.

So, when you file your Income Tax Return (ITR), you need to add the interest income from the FD to your total income for the year. The tax on this total income is then calculated based on the income tax slabs. If the total tax calculated is more than the TDS already deducted, you'll have to pay the difference. Conversely, if the total tax is less than the TDS, you can claim a refund.

For example, in your case, if your total income including the FD interest falls under the 30% tax bracket, you'll need to pay an additional 20% tax on the FD interest (30% total tax minus 10% TDS already deducted).

I hope this clarifies your doubt. Please consult with a tax advisor or chartered accountant for personalized advice based on your total income and tax slab.

Best regards.

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Question by Balaji - Oct 11, 2022Hindi

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I have a very basic question about direct taxes. Interest earned on FD is generally much lesser than inflation %. In that case, why is the interest earned on an FD, taxed? If I earn 5% interest on Rs 1 crore FD, it would be ~5 lakh per year, which should be tax free. What is your opinion?

Ans: In my view, Government usually frames income tax regulations in such a way that taxpayers are encouraged to keep investing part of their savings in long term secured mode of investments and which in turn can help taxpayer meet long term needs. Therefore, it provides exemption and deduction from income tax if you invest in specified modes for long term. For instance: Interest income earned from PPF, specified bonds, etc., have lock-in period and interest income is not taxable.

Similarly, if you invest interest income on FDs, in tax saver mutual funds (which have lock-in period of 3 years), you will get deduction u/s 80C up to specified limits.

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