Monday, April 11, 2011

What are the rules for deducting tax on fixed Deposit? When do the banks deduct TDS on a fixed deposit ?

TDS Information

What are the rules for deducting tax on fixed Deposit?

When do the banks deduct TDS on a fixed deposit? :

TDS (Tax Deducted at Source)

People prefer to deposit their savings in time deposits as such deposits earn higher rate of interest than normal savings account. However, they face the problem of TDS (Tax Deducted at Source) by banks for fixed deposits.
In Income Tax law, one of sources of the income is "Interest Income" and thus directions issued by income tax authorities have to be followed by all bankers.

What are the rules for deducting tax on fixed Deposit? When do the banks deduct TDS on a fixed deposit? :

Banks deduct tax (TDS), if the total interest earned on all your time deposits in the bank is greater than Rs.10000/- during a financial year. The tax liability for the purpose of TDS is determined at the branch level. Whenever the bank pays an interest on your fixed deposits, it checks it for TDS eligibility. If it qualifies, the TDS is deducted. TDS is also deducted on interest accrued (but not yet paid) at the end of the financial year viz. 31st March every year. The rate at which TDS is deducted varies according to the category of account holders

At present no interest income is exempted from tax (earlier interest income upto Rs.12000/- per year was exempted under Section 80L of the Income Tax Act). However, in certain conditions, no TDS is deducted on the interest earned on fixed deposits, e.g. (a) if the total interest earned on the deposit in a financial year is upto Rs.10000/-.

As per present income tax guidelines, banks are required to deduct tax at source (TDS) on deposits if the total interest earned on all your fixed deposits in a bank is more than Rs.10000 in a financial year. (As per these guidelines even if a fixed deposit is in the name of a minor TDS is deducted). However, the depositors can claim the credit for such TDS in their income tax returns. (In case of minors, this credit for TDS can be claimed by the person who manages the minor's income.

Remember, now a day as and when a bank pays an interest on the fixed deposits, it checks whether the account is exempted from TDS. If it is not exempted, then TDS is deducted. You should also remember that TDS is deducted even on interest accrued (but not yet paid) at the end of the financial year i.e. 31st March every year.

In case of resident individual and HUF, TDS is deducted at a rate of 10% (thus total deduction is at the rate of 10.0%). Thus, the present applicable rates are :

Resident Individuals & HUF Tax Rate Surcharge Education Cess TOTAL
Payment upto 10 lacs 10% ---- 0% 10.00%

If one feels that your total interest income for the year will not fall within overall taxable limits, then one should inform his / her bank not to deduct TDS on deposit, by submitting a form as per the provisions of the Income Tax Act. The forms required for different categories have been listed below:

Category of Account Form Required
Individual - Srcitiges 15H
Trusts 15AA
Individual - other 15G

Remember that : -

(a) You have to obtain [earlier 15AA Form ] certificate from the Assessing Officer of Income Tax department.
(b) Even if you submit the 15H / 15AA /15G Form, the tax which has already been deducted by way of TDS during the year prior to submission of 15H Form, is usually not refunded by the banks as they are under obligation to deposit this TDS within a time bound period. . However Certificates will be issued to the customers which can be used while filing his/her tax return.
· 15H/15AA Forms are valid only for the particular financial year in which they are issued.
· Usually banks ask that a fresh15H form is needed to be furnished for each deposit that is placed with the Bank

However, if the depositor furnishes form 15H/ 15G (which is available free of cost from all banks) and therein declares he / she does not have tax liability at all, the bank will not deduct any TDS from the interest earned by the depositor.

Thus, the above, in a nutshell indicates that if the interest income from a bank branch is more than Rs.10000/- (and you have not submitted form 15H), the Bank will deduct the TDS. For any TDS deducted by the bank, it will issue a Form 16A which can be used; while filing the income tax returns.

Thus, in case you do not want the TDS to be deducted, you can split your Bank Deposits in two or more Banks or branches so that the total interest earned at one branch is less than Rs.10,000/-. (However, remember this does not mean that income earned from such deposits is exempted from income tax. You have to club all such interest income and add to your other income, and pay the tax while filing the income tax return.)

TDS provisions are not applicable to 'A' class shares holders of the Bank

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