Here's How Your Bank Interest Is Taxed In India

BANGALORE: TDS or Tax deducted at Source is a tax collection mechanism by Government of India, where at the time of transaction itself, the tax is deducted by the paying party and directly deposited to the income tax department. It’s assumed that the receiving party will have some tax liability. Now at the end of the year when you find out your tax liability, the TDS amount is the tax you have already paid and now you need only pay the balance amount.

So in a way, TDS is a good thing for 2 reasons. You automatically pay a part of your tax liability and income tax department receives their tax collection. So TDS is always a mechanism, to reduce tax theft. Let’s see how it is applicable to bank accounts too.

TDS is applicable to fixed deposits:

The interest earned on savings account is exempted from TDS under Section 194 A of Income Tax Act. However, interest income from fixed deposit is liable for TDS if the interest income is more than Rs.10,000 in a year.

As per IT rules, if the fixed deposit holder is a resident individual, for an interest payment of up to Rs 10 lakh, TDS will be deducted at the rate of 10 percent along with an education cess of 3 percent which takes the total deduction to 10.3 percent.

Save TDS:

If your total annual income is below the exemption limit, inform the bank by submitting form 15G or 15H. The bank will not deduct TDS in that case. First, find out if you are really eligible for 15G or15H.
Split your fixed deposits across multiple banks so that the total interest accrued over a year is less than Rs.10,000. Time your FD in a manner that the total interest in a financial year does not exceed Rs.10,000. Remember, the financial year starts in April, not January like the calendar year.

Getting TDS Refund

In case your tax liability is zero, you can claim a refund. You can check the TDS details online through a facility called TDS enquiry. Before you file your returns, make sure to check Form 26AS to see how much tax the bank has deducted.