Tax Calculation on FD Interest
Financial year 2013-14 will be ending soon and by 31st March 2014 we all need to do our investment to save Tax. We have already provided some of the tips on how to save Income tax and some of the common saving options but you need to understand the tax calculation on FD interest to maximise saving. Readers can find the Slab of this year i.e. Financial year 2013-14 or assessment year 2014-15. As per rule the interest earned from Fixed deposit is also a part of your income and it need to be declared.
One of the most common question that comes to our mind is that do we only need to pay 10% of interest on FD which is automatically deducted by bank. The answer is NO, as said above interest is part of your income and if your income exceeds 5 Lakhs per annum then your tax liability will be 20% till 8 Lakhs and 30% above 8 Lakh. This means that interest earned on your fixed deposit will be under 20% or 30% scale and you need to pay tax on this. Please note that people do confuse with the fact that Rs 10,000 is exempted from Tax on interest. This exemption is applicable for savings account only and not the fixed deposits.
Lets take one example to understand this better. Suppose Ramesh is having a annual income of 10 Lakh rupees from his Job and had 5 Lakh rupees as fixed deposit at 10% annual return. He also has 2 Lakh rupees in his savings account at 4% annual return. Lets assume Ramesh is not aware of any tax saving policy and files the return.
Tax calculation on normal salary
|Scale||Tax Amount||Tax Rate||Taxable Income|
|2- 5Lakh||3 Lakh||10.00%||30000|
|5-8 Lakh||3 Lakh||20.00%||60000|
|8 – 10 Lakh||2 Lakh||30.00%||60000|
1 Lakh 50 thousand is his total tax that Ramesh need to pay on his annual. Is this his total return or he has missed some of the other form of income? Yes he has i.e. his FD interest as well as savings interest. Lets go directly to the calculation part.
Tax calculation on FD interest
5 Lakh of FD at 10 percent annual return will give him 50,000 Rs as interest. This will be directly added to his income and therefore his total income is 10 Lakh 50 thousand. Also he has 2 Lakh of investment in savings account at 4% and the interest comes out to be Rs 8,000. Will this be added to total income? The answer is NO as 10,000 is exempted and this is below 10,000. If the interest on savings account was more then 10k then we need to add this to calculate Tax.
So now Ramesh Total income is 10 Lakh 50 thousand and for the 50,000 bank would have already deducted 10% TDS which totals 5000. Therefore he need to pay addition 10 thousand to his total tax of 1 Lakh 50 thousand as this 50000 thousand will come under 30% tax bracket.
Last year when I filled my income tax return I found that my TDS i.e. Tax deduction at source from my FD was already in place. This is due to the PAN card that is now mandatory for a bank account and is a excellent move by government to automate taxation. This has made sure that tax calculation on FD interest is automated and now we need to be careful with our tax savings. Please make sure to pay the additional tax as now income tax department knows what you have already earned!!