Did you ever think you might have to pay tax on income you are yet to receive? Yes you have to, and in your favorite instrument - the good old bank fixed deposit - at that.
The tax on the interest earned at the end of a financial year on bank FDs, have to be paid even if the interest will be paid at a later date, or maybe years later. For example you have made an FD of Rs 50,000 for four years. You will have to pay tax on the liable interest for all the financial years it spans, even though the interest amount would come into your hands only at the end of the four-year tenure.
Says Tarun Ghia, chartered accountant, TMG & Associates, "If the tenure of the FD is more than one year, the interest is accrued every year, whether received or not." According to him, one needs to pay tax on the interest increase in advance.
The interest earned on FD is added to the individual's income and taxed according to the slab the individual falls into. In case, you earn interest income of Rs30, 000 in a given year, that amount will be added to your income and taxed accordingly. For a person whose income is above Rs1.25 lakh, the tax would work out to 10%. This will be added to your income each year, even though you haven't yet received the interest in your hands. In fact, interest should be calculated yearly.
The interest earned on FD is also compounded i.e. the FD interest is reinvested at regular intervals - quarterly, half-yearly or yearly. This is a phenomenon that helps grow your money further.
As a result of compounding, Ghia says, "Even if the interest during the entire term of the FD is 8% per annum, the interest for the first year will not be equal to that in the second year because of the cumulative effect."
Also, if the interest on a particular fixed deposit exceeds Rs10,000, tax is deducted at source (TDS), which is applicable per financial year. The bank will compute your interest and will deduct an amount equivalent to the tax, if any, by making adjustments in the FD amount. The TDS certificate or amount can be submitted when you are submitting returns to ensure that tax is not deducted twice on the same income. If the bank has not informed you about the TDS, please enquire with them about it.