10 common myths about fixed deposits and accrued interest

Fixed deposits, also called time deposits, are one of the most traditional investment options. While we may hear a lot of noise around SIPs for mutual funds, liquid, balanced and debt funds, stock picks, tax-free bonds, PPFs, EPFs, etc., the fact is that nothing can beat security. and the simplicity of a Fixed Deposit. Although they are tax-inefficient and not the best return provider, fixed-term deposits deserve their own cake in your portfolio. Tell me if there is any other investment option that you know of that is as simple, safe, liquid, control-free and risk-free all in one as a fixed deposit. Actually there is none. It is priced for tax inefficiency and slightly lower returns, but in many cases, returns may not be the only criteria for deciding on your investments.

So if you’ve started to feel happy that all that chunk of fixed deposits sitting almost unattended in your bank accounts is now justified, let me warn you. Your fixed deposit is earning interest. The bank may also be deducting some taxes (TDS). But you may be responsible for more taxes. And if you haven’t been paying for that, you could be in serious trouble. Yes, when you file your income tax returns, you are responsible for calculating the additional tax you need to pay on your fixed deposit interest and then paying that too. This may be entirely on top of the TDS that the banks may have deducted. If you’ve been ignoring that, I’m sure you also understand that ignorance of the law is never an excuse. The interest earned on your inefficiently managed time bank deposits can get you into serious trouble with the tax collector.

Let’s eliminate some of the common myths surrounding Time Deposits and the interest that increases from them:

myth 1

Fixed deposit interest is hidden from the tax collector

done 1

All Banks report the increase in interest against their PAN Number to the IT Department. So, gone are the days when banks and their branches were offline. Today, in this interconnected world of PAN and Adhaar, there is no way to escape the prying eyes of the tax collector.

myth 2

The bank has already deducted TDS, so you don’t need to pay more tax

fact 2

Banks deduct only 10% of interest earned as TDS, or 20% if you have not provided the PAN Number to the bank. But it may actually be responsible for more. It all depends on your total income in the tax year. If you are in the 30% tax bracket, you must pay 30% tax on interest earned on time deposits, after adjusting for the 10% or 20% TDS that the bank may have already deducted. If you are in the 20% tax bracket and the bank has deducted only 10% TDS, then you must pay another 10% tax on the interest you have earned.

myth 3

You have submitted form 15G/H, so there is no tax liability

fact 3

Form 15G/H has a very specific purpose in that you are confirming to the bank that you are not likely to fall into even the 10% tax bracket in the current tax year and therefore asking the bank to not deduct TDS. But if that doesn’t turn out to be true at the end of the tax year, you have to pay taxes based on which tax slab you’re on.

myth 4

Your interest is less than Rs 10,000 in a financial year and therefore there is no tax liability

fact 4

Even INR 1 interest earned on fixed deposits is taxable, unless of course it falls on the 0% tax slab. This exemption of Rs 10,000 does not apply to interest on fixed deposits. This exemption is only available for interest earned on idle money in your savings account. Therefore, you are taxable even if your interest income is less than INR 10,000. The only benefit it has is that the bank will not deduct any TDS until the interest exceeds INR 10,000. Even if that is the case, you will have to pay the applicable tax at the time of filing the ITR.

myth 5

I have a recurring deposit. Interest is not taxable here

done 5

100% wrong. Whether FD or RD, each rupee of interest earned is taxable according to your current tax form

myth 6

I have invested in a 5 year tax free FD. Now it won’t be recorded

done 6

Quite in contrast to its name, duty-free FDs are actually NOT tax-free. Yes, they do not help you save taxes on your interest income from the time deposit. They help you save taxes by showing the principal investment under Section 80C, just as you can save taxes by showing the EPF or PPF investment under Section 80C. However, each rupee of interest is taxed as on any normal fixed-term deposit.

myth 7

National Savings Certificates (NSC) or Kisan Vikas Patras (KVP) are tax free

done 7

Once again, none of this is true, and every rupee of interest is taxed just like any normal time deposit.

myth 8

The senior deposit plan is tax-free

done 8

Once again, none of this is true, and every rupee of interest is taxed just like any normal time deposit.

myth 9

I have invested in a FD in the name of my wife. Therefore, I am safe from any tax.

done 9

Money gifted to a spouse does not attract taxes. But if that money is invested, the income it generates is clubbed with the donor’s income and taxed accordingly. If a husband has invested in fixed deposits in his wife’s name, the interest will be taxed as his income. So, better avoid wasting your time and effort.

myth 10

I have invested in my son’s name. Therefore, I am safe from any tax.

done 10

Money given to a child does not attract taxes. But if that money is invested in the name of a minor child, the income it generates is clubbed with the donor’s income and taxed accordingly. If a parent has invested in time deposits in the name of his minor child, the interest will be taxed as his or her income. So, better avoid wasting your time and effort. However, for children, there is a small exemption of Rs 1,500 per year per child for up to two children.

Calculate the tax to be paid on the FD interest

1. Calculate your total interest income from all fixed deposits in a fiscal year. Let’s say it’s INR 50,000

two. Find your tax table (based on your total income, which includes all sources of income, including FD). Let’s say it’s 20%

3. Based on 1 and 2 above, calculate the tax to be paid on the FD interest. It will be 20% of 50,000 = INR 10,000

Four. See Form 26AS to see the TDS already deducted. Assuming it was deducted at the standard rate of 10%, it will be INR 5,000

5. Additional tax payable at ITR filing = INR 10,000 (based on 3) – INR 5,000 (based on 4) = INR 5,000

How do I file tax on interest income?

Report total interest as “Income from other sources”

On the ITR form, it will be added to your total income and taxed according to the tax slab it will fall into.

Avoid trying to be smart with IT

In today’s interconnected banking system, avoid the following, play safe and live a peaceful life:

1. Do not try to submit Form 15G/H just to avoid TDS. Giving a false statement can be considered a very serious crime, which could even lead to jail for up to 2 years. This information comes to the individual’s Form 26AS. One can only imagine what will happen to an investor whose Form 26AS indicates filing of Form 15G or 15H with multiple banks and income that exceeds the basic exemption limit. In any case, even if he can avoid the TDS by the bank, he is responsible for calculating and paying the total tax while filing the ITR. Playing such games is simply not worth it.

two. Don’t waste your time and energy dividing your bank’s FDs among multiple banks or branches. Each account is connected through its PAN number.

3. Avoid trying to save taxes by investing on behalf of your spouse or minor children. There is an income garrote provision that leads to all interest earned by your spouse or child being pooled with your income and taxed accordingly. In some cases, it might be useful to invest in your parents’ name, because the clubbing provision doesn’t apply there. However, just make sure that the parents’ income and tax liability do not increase because of it.

Having a clear understanding of fixed deposits and the tax liability that arises from interest income from them will keep this investment option the way it was designed: simple, guaranteed, liquid, unsupervised and risk-free. Then you can enjoy its true charm!