Interest earned from Fixed Deposits (FD) and Recurring Deposits (RD) at banks and post offices is considered as "Income from Other Sources" and is fully taxable. The tax treatment of interest income from FDs and RDs is subject to the individual's applicable tax slab rates.
Banks and post offices are required to deduct Tax Deducted at Source (TDS) on interest income from FDs and RDs if the total interest exceeds ₹40,000 in a financial year. For senior citizens, the TDS threshold is ₹50,000.
Individuals whose total income is below the taxable limit can submit Form 15G (for non-senior citizens) or Form 15H (for senior citizens) to the bank or post office to avoid TDS on interest income.
Interest income from FDs and RDs must be reported in the Income Tax Return (ITR) under the head "Income from Other Sources". The total interest earned during the financial year should be included, irrespective of whether TDS has been deducted or not.
Consider an individual who earns ₹60,000 as interest from fixed deposits in a financial year. The tax calculation would be as follows:
The total interest of ₹60,000 should be included in the individual's total income and taxed according to their income slab rate. The individual can claim credit for the ₹6,000 TDS deducted.
Note: Senior citizens can avail of higher tax benefits on interest income under Section 80TTB, which provides a deduction of up to ₹50,000 on interest income earned from savings accounts, fixed deposits, and recurring deposits.