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Tax aspect of Bank Deposit and Corporate fixed deposit

FDs are becoming popular investment among investors in the current interest regime. However, the actual return earned on a fixed deposit can be less that what is stated due to tax aspect attached to a FD. Financial expert Nitin Vyakaranam gives us insightful information on how tax is calculated and how taxes can be saved on FD investment.

May 22, 2013 / 12:05 PM IST

Bank Fixed deposits are known for giving risk free returns. Fixed deposits for long have been one of the favorite avenues of investors in India who do not trust the capital markets. Fixed deposit as an investment instrument is very easy to understand. In simple terms one puts the money with the bank for a specified tenure and bank repays the money with a specified interest rate. It is regarded as one of the safest investments. However, we often overlook the tax implications associated with bank fixed deposits. The interest earned on the bank fixed deposit is subjected to TDS, if it exceeds INR 10,000 in a financial year. This clause holds good even for the tax saving fixed deposits made. Banks have made PAN Card mandatory for the investments which attract an interest in excess of INR 10,000 in a financial year. The taxation on fixed deposits mean that the actual interest rate earned on the investment is less than the interest rate promised by the bank.


How is tax calculated on the fixed deposits?


The income accrued as interest on bank deposits in accounted under the income from various other sources head of income tax code. The interest earned on fixed deposits is taxed as per the tax slab rates of the individual. For example, consider an individual who accrues an interest of INR 15,000 in a financial year. If the individual is in 20% tax bracket, 20% of INR 15,000 is charged and a 3% cess is charged on it. Generally the tax is deducted at the source.


Companies use corporate fixed deposits in order to raise debt for their operations. These investments bear more risk when compared to the bank fixed deposits. Though the repayment is agreed on a specific interest rate, default risk plays an important role in such investments. The repayment of corporate fixed deposits is directly linked with the performance of the company. If the company fails to perform, the chance of defaulting on the repayment increases. So, the company fixed deposits generally pay a higher interest rate than bank deposits. In case of company fixed deposit, the TDS limit of the interest earned is caped at INR 5,000. The companies would deduct tax at source if the interest earned in a financial year exceeds INR 5,000 as per the tax slab of the individual.


How to avoid tax on fixed deposits


Form 15G/15H: The investor should submit a 15G or 15H form stating that their total income from all sources in under permissible non – taxable income levels. Individuals below 65 years should file form 15G and individuals aboe 65 should file form 15H. However, individuals whose income from sources which are considered under the income from other sources head exceed INR 1 lakh, cannot file a 15G form. 


Distributing the FD investments: Distributing the FD investments across various companies so that the interest earned does not exceed the permissible level is an effective option to avoid TDS. Previously the same strategy was also applied for bank deposits. However, introduction of Core Banking System (CBS) gave the banks an option to pool the investments based on PAN Number.


Timing of the FD investments: Timing of the investments can also be used effectively to avoid TDS. The investment is spread over two or more years to ensure that the interest earned in a single financial year does not exceed the limits.

 

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