Investing in fixed deposit could be actually beneficial; still, overseeing some essential aspects could let you face certain loss due to TDS.
Priya Sharma, one of my mother's friends and a retired private sector employee, went into deep shock when she got her bank account statement. It showed a 10% deduction of TDS (tax deducted at source) on her FD (Fixed Deposit interest income).
Well, just like every retired and concerned individual, she deposited all her retirement savings costing Rs. 30 lakh in an FD, That offered her a 9% interest per annum. The twist introduced in her life when she expected to receive Rs.2,70,000 lakh as an interest income, but only got Rs. 2,43,000 as her bank deducted 10% TDS (Rs.27,000) from the amount.
She wasn't even liable to pay any sort of tax as she had no other major sources of income. And according to the policy too, senior citizens (60 years and above) with a maximum income of 3 lakh are exempted from tax.
Generally, if your interest income goes above Rs.10,000 a year, the bank is liable to deduct TDS at 10% rate, over the whole interest earned. Although, if the depositor isn't able to furnish the PAN permanent account number details with their bank, then the TDS will go up to 20% per annum. Now, as Priya is left with no other solution, she could just claim back the TDS, by filling Income Tax Return and can wait for her refunds.
But that's not the case with everyone. If you fall in the 30% tax bracket, you still need to pay the remaining tax yourself. This graph explains us an Investment of Rs. 10 Lac in Jan 2013 with a Fixed deposit (8.75% interest rate, 30% Tax slab) and same investment in Aditya Birla Sun Life Short Term Opportunities Fund.
Thus, the whole story unfolds and depicts that TDS could be inescapable at times, although, with certain measures, you can definitely avoid it. So, know about those measures here!
Submit the Form 15G or 15H
If you wish to prevent your bank from deducting the TDS, then choose to submit form- 15G/15H. These are self declaration forms which state that the depositor's income is less than the specified taxable limit. Form 15H goes for depositors aged above 60 years and 15G is for the ones aged below 60years. Individuals whose complete tax payable for the annum is nil, and whose overall interest income stays below exemption limit can submit any of these forms and can avoid TDS deduction.
Distribute the investments across banks
As now you are aware of the condition that if your interest on FD deposit goes above Rs.10,000 across the various branches of same bank, you are supposed to experience a TDS deduction. Thus, calculate wisely and spread your overall investment amount across various banks. With a different maturity period, you can extract out several benefits from your investments. But this is cumbersome.
In a 5 year FD, you will get the accumulated amount only after 5 years, but tax is deducted every year and you need add this income to file returns. So, before you plan to deposit in an FD, just ensure that you have considered these points and then invest accordingly, to avoid TDS as far as possible.
Doesn't this sound too tedious?Do we have any alternative solution?
Yes, we have a solution and that is DEBT MUTUAL FUNDS. The growth is not taxable unless you withdraw. Only that amount that you withdraw is subject to short or long term capital gains tax if you withdraw before 3 years or after 3 years. In case your money is untouched for 3 years then the gains are subject to long term capital gains tax, which allows indexation to come into the picture and thus, reducing your tax liability significantly. Read More about Long & Short Term Capital Gains here.