### Tax deducted at source

POSTED BY ON November 10, 2011 10:10 am COMMENTS (6)

Hi guys,
query1:I am confused abt tds calculation for fixed deposit.For example if i am investing 1 lakh in tax saving fixed deposit at 9% interest then i get around 10,000 as interest for each year.At the end of the 5 yr i get around 56000.my query is tds is done on this total amount(56000) or tds is done on the interest accrued every year(around 10,000)?

query2:suppose i am getting 11,000 interest amount from tax saving fixed deposit in a year,then do i need to declare this interest income in it return or i can ignore this interest income since it is from a tax saving deposit.

query3:people are saying interest from ppf is non-taxable.What does it mean?There is no tds only or both tds and tax on interest income are not levied for ppf

1. ashal jauhari says:

Dear vj-manutdfan, Just want to add one thing in the whole discussion – in case of tax saver bank FDs you can’t break in between. So in a sense, your money is locked for 5Y. Also you can’t pledge these FDs to raise a loan in case of need of money.

Thanks

Ashal

1. vj-manutdfan says:

Thanks a lot ashal

2. 1) TDS is done only when the interest payout is effected.ie in your case, at the end of Year 5. Till that point in time interest accrues. Suppose you break the FD during year 4. Then the TDS will be done on interest accrued till that point.

2) The interest from a Tax Saving deposit is taxable. If you have received the payout then you need to declare this amount in your tax returns.

3) PPF is under the EEE (Exempt-Exempt-Exempt) regime. It means that when the money it deposited in PPF it is exempt from tax. When the interest is paid year on year it is exempt from tax.When the amount is withdrawn again it is exempt from tax. In fact since return on PPF is 8% it is really the euivalent of a notional return of 11.4% for someone in the 30% bracket. How: Assume your FD pays you 11.4% and you pay a tax of 30% on this return. Hence your actual return is reduced by 30% = > Return is actually 8%. This is what a PPF yields as the amount is tax free!

1. vj-manutdfan says:

Thanks a lot for the answer.my understanding according to your explaination is that the interest accrued every year(around 10,0000) on 1 lakh fixed deposit(for 5 yrs) will not be taxed in that year but it will taxed only at the end of the tenure of that fixed deposit(i.e at the end of 5 years in this case).Please tell if this is correct?

i am always confused between TDS and the tax we have to pay for interest earned from FDs.Suppose i pay 10% TDS on 56000(which is the interest earned in this case).does this mean i need not tax for the same amount when i file my income tax return.some people say that if we show proof for TDS then we need pay the tax for interest amount earned from FDs.Please clarify.

I was caught between PPF and Taxing savings FDs.but i believe Tax saving FDS which come with 5 years lock are better than ppf bcoz of higher interest rate and lesser lock in period .whats ur take on this?

1. 1) Your understanding is correct, You need to pay tax when you receive the amount/interest from the bank. Not during year 2 or year 3 but at end of year 5 in this case, assuming you dont break the FD

2) TDS is tax deducted at source. If 56000 is your interest income and you fall in 30% tax bracket then your tax is 56000*30/100= 16,800. If Bank deducts 10,000 as TDS then you have to pay the remaining 6,800 as tax. But if bank incorrectly deducts 20,000 then you can claim 20000-16800 = 3200 as refund. End of the day the numbers must add up.

3) PPF/EPF is the ultimate source in Debt for long term investment. Agreed the lock in period is 15 years. If liuidity is a concern PPF kinda does not go too well. In such a case alone FD may be better. But if you can part your money longer PPF wins hands down.

1. vj-manutdfan says:

Thanks a lot for ur elaborate answers

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