Few days back I met a client in early 50s. He had heavy investments in fixed deposit [FD] and recurring deposits [RD] with banks. He was proud to tell me that he has a risk free and guaranteed return of 8-9%. When I ask them about tax implication he told me taxes are very less it is 10% for the FD and 0% for RD. Since he was earning well above 40 lakhs per annum from salary I was aware he is in the highest tax slab of 30%. I curiously asked him who told you about this taxation on deposits? I also asked him has he been taking help from someone for filing his income tax returns. He replied he had taken tax related advice about this from his bank. He also said he does the tax filing himself online. He is not alone in having this wrong knowledge on taxes related to fixed deposits and recurring deposits. Here is the correct information on taxation for these FD and RD. Few months ago I had read a news article that said that Income Tax department has sent notices to many people who had not filed their return even after having a healthy interest earnings from FD or RD.
- Interest earned from Fixed and Recurring deposits are fully taxable in your current tax slab
- No TDS does not mean zero tax on Recurring Deposits
- Only 10% TDS on Fixed Deposits does not mean tax rate is 10%
You also need to remember the following when it comes to income tax on FD and RD:
- Tax on interest is payable in the year it is earned. E.g. if you have a FD maturing two years later but this year you have earned interest of Rs. 2000/- you need to pay tax on this Rs. 2000 this year and not in the year it matures. Yes this means you have to make provision for paying income tax on interest portion of FD and RD even before getting their proceeds in your bank account.
- Reinvesting a FD or RD into another FD or RD does not mean the return is tax free.
- Tax is only payable on the interest earned and not on the whole amount. Your principle amount was after all your already taxed income.
- Bank deducts a TDS of 10% of the interest earned in FD if the interest amount exceeds Rs. 10000/-. However it is the liability of the customer to either pay additional tax if in higher tax bracket or demand a refund at the end of the financial year after filing income tax returns.
- Currently banks are not required to deduct TDS on RD hence they do not deduct it. Again this does not mean it is tax free, customers should pay advance tax on these returns on their own.
How are from Fixed and Recurring deposits taxed?