Nobody likes paying taxes. More so, if it is on the interest on your very safe bank fixed deposits. So, what do you do if your bank deducts TDS on the interest income on your bank FD and you taxable income falls below minimum tax exemption limit?
Your taxable income is within minimum tax exemption limit (Rs 2.5 lacs). If your bank had not deducted TDS, you wouldn’t have had to claim this excess tax (TDS) as refund while filing income tax return. Is there a way to avoid this TDS if your total tax liability during the year is Nil? Yes, there is. You can provide declaration under Form 15G/15H to avoid TDS.
TDS on Bank Fixed Deposits
A bank is required to deduct TDS (Tax deducted at source) if the interest paid during the financial year exceeds Rs 10,000 across all its branches. TDS is the tax deducted upfront by the bank (from the interest) and deposited with the Government.
If you have furnished PAN with the bank, TDS will be deducted at 10%. Otherwise, the bank will deduct TDS at 20%. Please understand this has no relation to your marginal income tax rate (income tax slab).
Is there a way to avoid TDS?
To avoid tax deduction at source (TDS), you can furnish Form 15G/15H with the bank. Form 15G can be submitted by depositors below 60 years of age and Form 15H by depositors above 60 years.
Under Form 15G/15H, investor gives the declaration to the bank that his/her taxable income (including the interest income) won’t exceed the tax exemption limit (Rs 2.5 lacs or Rs 3 lacs or Rs 5 lacs depending upon age).
On receipt of such declaration under Form 15G/15H, the bank won’t deduct any TDS.
With this, you can avoid hassle of claiming tax refund if your total taxable income (after including interest income) is less than the tax exemption limit.
You can also check sample Form 15G or Form 15H from Income Tax website. These forms are also available at bank branches.
Who can file Form 15G/Form 15H?
Not everybody can file Form 15G/15H. There are a few conditions to be met.
If you are less than 60 years
You can file Form 15G if your estimated income tax for the financial year is Nil and your total interest income is less than minimum tax exemption limit (>=Rs 2.5 lacs). Please note both the conditions have to be satisfied.
If you are a Senior Citizen (>=60 years)
You can file Form 15H.
There is relaxation of second condition in case of filing Form 15H. You can file for Form 15H if your estimated income tax for the financial year is Nil. So, if you are above 60, you can furnish Form 15H if your total taxable income is less than Rs 3 lacs (Rs 5 lacs for people above 80).
Please note the interest income includes all interest income that is chargeable to tax in that financial year. Hence, fixed deposits across the entire banking system must be considered before filing Form 15G/15H.
Examples
For taxpayers less than 60 years of age, both interest income and taxable income has to be less than Rs 2.5 lacs. For senior citizens, only the taxable income has to be less than Rs 3 lacs (Rs 5 lacs for very senior citizens). There is no restriction on interest income for senior and very senior citizens.
Declaration under Form 15G/15H won’t be treated as valid if you have not furnished correct PAN in the declaration (15G/15H) to the bank.
What if I file Form 15G/15F when I am not eligible?
A false or wrong declaration may attract penalty or imprisonment under Section 277 of the Income Tax Act. You are advised to check eligibility for submission of Form 15G/Form 15H before submitting Form 15G/15H to the bank.
Can NRIs also avail TDS exemption by filing Form 15G and 15H?
As per Section 197A of the Income Tax Act, only residents are allowed to avail TDS exemption by filing 15G and 15H. Hence, non-residents (NRIs) can not avail TDS exemptions by filing Form 15G and 15H.
Does payment of TDS complete my tax liability?
No. Payment of TDS does not complete your tax liability. If you fall in the higher tax-brackets, you will to have to pay excess tax at the time of filing income tax returns (or as advance tax). For instance, even if you fall in the 30% tax slab; the bank would have deducted TDS only at the rate of 10%. You need to pay the remaining tax.
You will get tax credit for TDS already deducted.
Point to Note: Entire Fixed Deposit interest is taxable
Entire interest income is taxable unless specifically exempted by the Government. For instance, interest of tax-free bonds is exempt from tax. Interest on savings account up to Rs 10,000 is exempt from tax under Section 80TTA.
Must read: 15 lesser known Income Tax Deductions
There is no such exemption on interest income on bank fixed deposits. The entire interest income is added to your income and taxed at your marginal tax rate (income tax slab) Hence, the entire interest income on fixed deposits is taxable.
You may have fixed deposit accounts in two banks. With one, you earn Rs 9,000 as interest. With the other, you will earn Rs 8,000 as interest. Since the amount is less than Rs 10,000 with either of the banks, the banks wouldn’t deduct any TDS. However, you need to add Rs 17,000 to your taxable income and pay tax accordingly.
Points to Note:
- You have to submit Form 15G/15H every financial year
- You must submit Form 15G/Form 15H with every bank you have fixed deposits with (and want to avoid TDS). There is no exchange of such information between banks.
- Submit the forms at the beginning of financial year. This will ensure that banks don’t deduct TDS on the interest income.
- You can also submit Form 15G/15H with Post offices (for Senior Citizen Savings Scheme) or NBFCs (fixed deposits) where your interest income can be subject to TDS.
- Consider interest income from all the instruments (where Form 15G/15H can be furnished to avoid TDS) to calculate total interest income for the purpose of filing Form 15G/15H. If the total interest income (or total taxable income as the case may be) exceeds minimum tax exemption limit, you cannot file form 15G/15H.
Image Credit: Tax Credits, 2012. The original image and information about usage rights can be downloaded from Flickr/TaxCredits.net