Tax on FD Interest: What are the post-tax returns on an FD?

Traditional investment and saving options such as fixed deposits (FD) continue to remain popular with investors. However, there is one aspect that many investors, especially those falling within higher tax slabs, fail to look at. The interest income that one earns through fixed deposits is taxable according to one’s income tax slab. As a result, the post-tax returns are relatively low.

Fixed deposits give you a fixed interest either annually or on a cumulative basis. What is important here is that this interest income is taxed on an accrual basis. The interest that one earns on their fixed deposit gets added to the person’s income and is taxed in accordance with the income slab. As a result, this tends to reduce post-tax returns, especially of those who fall under the highest tax bracket.

Banks are required to deduct TDS at the rate of 10% in case the interest accrued from fixed deposit for the year is above a threshold limit. It is ₹50,000 in case of senior citizens and ₹40,000 in case of non-senior citizens. If PAN card information has not been provided, TDS is deducted at 20%.

Section 80TTB

Income earned by a resident senior citizen being interest from deposit, can be claimed as deduction u/s 80TTB from the gross total income. Deduction amount will be a certain amount of income i.e interest earned or Rs. 50,000, whichever is lower. In simple words, maximum deduction that can be claimed under section 80TTB is Rs. 50,000. Specified income is any combination of the following incomes:

1. 1-On bank deposits, interest (savings or fixed)
2. 2-Deposit interest earned at cooperative societies that are in the banking sector, such as cooperative land mortgage banks or cooperative land development banks
3. 3-On post office deposits, interest

In general, investors need to evaluate if post-tax returns are beating inflation. Investors in the 30% tax bracket may find that their post-tax returns on FDs may not be sufficient to beat inflation. The implication of this is that the people in the lower tax bracket tend to gain more in terms of the returns that they receive from the FDs as compared to those whose income goes into the higher tax slabs. Here is an illustration:

In the above illustration, we can see that the return on fixed deposits for those individuals in the higher tax bracket of 30% is only 6.19%. As compared to this, a person in the lowest tax slab is able to fetch a return of 8.07% on the same investment post taxation.

Note : The above calculations have been made ignoring the deduction available under section 80TTB for comparison purpose.

Hence, it’s essential to look at post-tax earnings and not just the interest rate to see whether investing in FD will actually match your return expectations.