23. FD and its taxation

How FD is taxed

The interest income earned through fixed deposit is taxable, if the interest amount exceeds Rs 10,000, in any financial year. This income is added to your total income under header "Income from other sources" and then taxed as per the income slab. A very important point to note is that the interest income from fixed deposits are taxed on accrual basis and not when actually received. This means that the tax on interest income earned at the end of financial year have to be paid even if the interest is credited at a later year. For e.g. if you are investing Rs 75000 in a  fixed deposit for five years, you will have to pay tax on liable interest for all financial years it spans, even though the interest will be credited at the end of fifth year. Also, Tax Deducted at Source (TDS) is deducted by the banks if the interest amount exceeds Rs 10000 from one or through multiple investments. Even FDs in name of the minor attract TDS, if the interest exceeds the limit.

What you earn?

In a higher interest rate scenario, the going is good for investors in lower tax bracket. The investments from fixed deposits yield them returns that are worth talking about. But as your income go into the higher slabs the taxation starts affecting the net earnings. 

Consider an interest rate of 9.25% p.a. on a 10 year fixed deposit of Rs 2 lakh. Most of us will be lured by this fixed return which is very high if compared with rates few years back. However, the real picture is very different from what is presumed when taxation is considered.

Tax Slab (%)	Amount Invested (Rs)	Interest (Rs)	Tax (Rs)	Net Interest Earned (Rs)	Post Tax Return (%)
10	200000	18500	1905.5	16594.5	8.29
20	200000	18500	3811	14689	7.34
30	200000	18500	5716.5	12783.5	6.39

 

As can be seen from the above illustration individuals in higher tax slab of 30.9% tax, the post-tax returns are 6.3% from this fixed deposit. As against this, an individual in the lowest tax slab will be able to fetch 8.3% return on the same investment post taxation. Surely, the benefit accruing to lower tax category has lot to cheer.