Nov 132016
 

TDS Calculation for FDs

Before we start with TDS calculations for FDs, let us take a quick look at FDs. Let us begin with the question, what is an FD? FD is the abbreviation used for Fixed Deposit. It is a type of investment where you will earn interest on the money you invest. In reality, what you do is that you lend money to a bank when you open an FD account. The bank will then invest this money in market and earn from the same. A certain percentage of that income will be paid to you by the bank in form of interest.

TDS Calculation for FDs

There are some features of FD and you need to abide by the rules:

  1. FD has to be created for a certain fixed period of time.
  2. There will be a lock in period, during which you cannot withdraw the FD fund. Once that lock in period is over, you can actually go ahead and break your FD and withdraw all funds (including the accumulated interest) before the FD matures. Alternately, you can simply wait for the FD to mature and then withdraw the whole fund.
  3. Once you make an FD, you cannot invest more money into the same account. If you want to invest more, you will have to open a separate FD account.
  4. Withdrawals made from FD account are subject to taxation. The type of tax applicable here is TDS or Tax Deducted at Source.

TDS rules for FDs:

There are a couple of rules that you need to follow. First thing first, you don’t need to pay TDS for your FD withdrawals on your own. The bank will deduct the tax amount on the interest you earn and then pay you. So, the tax will be collected right at the source of the income (in this case the income is the interest you earn on your FD account).

Now when it comes to TDS, there are two rules:

  • You have updated your PAN details.
  • You have not updated your PAN details.

TDS calculation for FDs will depend on these two rules. However, there is another rule:

  • If the collective interest you earn from all your FD accounts exceeds INR 10,000 in any given financial year, you will have to pay TDS. There is no way out.

Now let us take PAN details into consideration…

TDS calculation for FDs if you have update your PAN

Here the rule says that if your collective interest from all FD accounts you hold is greater than INR 10,000 in any given fiscal year and you have updated your PAN, the TDS rate applicable will be 10%.

Let us take an example…

You invest INR 2 Lakhs or 2,00,000 in an FD account for 5 years and another INR 2 Lakhs in another FD account for 3 years. The total FD deposit you have is INR 4,00,000 or 4 Lakhs.

You earn interest of 8% yearly.

You have updated your PAN.

So the interest you earn in one fiscal year is 8% of INR 4 Lakhs.

This equates to INR 32,000.

Calculation is: Interest = 4,00,000 x .08 = 32,000

Now, the collective interest is INR 32,000. This is greater than the limit of INR 10,000 which is set. So, you have to pay TDS.

Since you have updated your PAN, the TDS that will be deducted is 10% of the earned interest.

Thus,

TDS = (10/100) x 32,000 = 3,200

So, you will pay a TDS of INR 3,200. This amount will actually be deducted from your early interest earnings by the bank. The net interest you earn after the TDS deduction will be INR 32,000 – INR 3,200 = INR 28,800.

TDS calculation for FDs if you have not updated your PAN

Here the rule says that if your collective interest from all FD accounts you hold is greater than INR 10,000 in any given fiscal year and you have not updated your PAN, the TDS rate applicable will be 20%.

Let us take an example…

You have three FD accounts with following specifications:

Sl. No. FD amount FD tenure Interest on FD Interest income PAN updated
1 INR 5 lakhs 5 years 8% INR 40,000 No
2 INR 2 lakhs 5 years 8% INR 16,000 No
3 INR 4 lakhs 5 years 8% INR 32,000 No

We are assuming that all FD accounts are with the same bank and same branch of the bank.

So, the total interest you earn on the total FD deposit you have is INR 88,000 in a given fiscal year. This is way more that the yearly tax exemption limit of INR 10,000.

This means, you need to pay TDS.

However…

You have not updated your PAN. This means the bank will deduct TDS at a rate of 20%.

So,

The TDS you need to pay (or the TDS that will be deducted by the bank) is:

TDS = (20/100) x 88,000 = INR 17,600

So, the net interest earning you will have at the end of the fiscal year is:

Interest earning = INR (88,000 – 17,600) = INR 70,400.

Now, that’s the calculation for just 1 year. What about 5 years? The TDS amount in 5 years will be INR 17,600 x 5 = INR 88,000. This means that you actually lose a whole year’s worth of interest earning in 5 years! That’s a lot of money that you lose.

If in the above scenario, you updated your PAN, the TDS would amount to INR 8,800 and the net interest earning would have been INR 79,200.

Thus, it is always wise to update your PAN if you are investing money in FD and the amount invested will earn more than INR 10,000 as interest in a given fiscal year. You can save a significant amount of money each year. Depending on the tenure of the FDs you have, your loss can grow significantly. So, it is better to update PAN for large FD investments.

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