Will TDS affect your FD returns?

With the current equity crash, it comes as no surprise that many investors are rushing to enjoy the safety of bank fixed deposits (FDs).

As a result, banks have started offering FDs with attractive interest rates. This has only served to induce more and more customers to opt for bank FDs. But not many have given a thought to the taxation aspect.

Remember it is very important for an investor to consider even the taxation aspect of their investment as taxes can significantly lower your returns generated by the investment. In case of FDs, banks deduct TDS before letting you withdraw the final amount at maturity.

What is TDS?

TDS means Tax deducted at Source. It is deducted by the banks if the interest earned on your FD exceeds Rs 10,000 in a financial year.

Why do banks do this?

Remember, interest earned on FD is your income. As any income earned attracts income tax, the income tax department has authorised banks and financial institutions to deduct tax before letting the depositors withdraw their money, inclusive of interest earned.

When do banks deduct TDS?

At the end of each financial year, the bank calculates the total interest earned by all your FDs. If the interest earned exceeds Rs 10,000, it will deduct TDS. This is done even if you have opened the FD in the name of the minor.

Any time, the bank pays interest on your FD, it checks for your TDS eligibility. This eligibility is decided by each branch of the bank.

How do changes in FD affect the changes in TDS?

Assume you have an FD of Rs 1 lakh with your bank. The rate of interest offered by your bank on this FD is 10%. It means the interest you earn on this FD is Rs 10,000.

Now suppose the bank hikes the interest rate to 11%. This means the interest you earn now becomes Rs 11,000, which means you'll attract TDS. Alternately, assume you have deposited Rs 50,000 in your FD at the rate of 12%. So you earn an interest of Rs 6,000.

Now if you make another deposit of Rs 50,000 at the same rate of interest, the total interest you earn will be Rs 12,000. This will make you eligible to pay TDS.

Always remember any increase in the rate of interest or deposit amount will make you liable to pay TDS.

How am I affected by TDS?

Are you an individual or a corporate? Remember the rate at which TDS is charged varies for both of them. In case of an individual or HUF (Hindu Undivided Family), the TDS is charged at the rate of 10.3% for amounts not exceeding Rs 10 lakh (Rs 1 million) and 11.33% for amounts exceeding Rs 10 lakh.

In case of corporates, the tax is charged at the rate of 20.6% for amounts below Rs 1 crore (Rs 10 million) and 22.6 if the amounts exceed Rs 1 crore. Banks will issue Form 16A for the tax deducted. You have to include this tax when computing tax liability for filing your tax returns.

What should I do if I don't want the bank to deduct TDS?

If you don't want banks to deduct TDS from your interest income, you have to submit Form 15H (for individuals) or Form 15AA (for trusts) to the bank. These forms are available with the branch where you have made the deposit.

Alternately, you can split up your deposit amount across multiple banks and branches in order to ensure your interest income doesn't exceed Rs 10,000.