Avoid income tax notices, understand how to report bank FD interest on your ITR
Bank fixed deposits (FDs) give interest that is entirely taxable. Taxpayers have made mistakes with the way they disclose interest income on many occasions, resulting in them receiving warnings from the Income tax department. Many taxpayers recently received notices from the Income tax department informing them the discrepancies between the FD interest income data held by the tax department and what was recorded on the income tax return (ITR) filed by them.
Let’s look at the rules for FD interest taxes and how to report it on your ITR to avoid getting a notice from the tax department.
Read Also: 15 Reasons you may get Income Tax Notice
Individuals’ interest on bank fixed deposits is entirely taxable, but senior citizens can take deduction up to ₹50,000 from their investments and fixed deposit interest. Senior citizens who are seeking a deduction must include it on their tax return (ITR). Senior citizens must report interest income under the heading “Income from other sources” and demand a deduction under Section 80TTB.
The depositor, on the other hand, has the option of reporting interest income either in the year of accrual or in the year of receipt of interest on the ITR.
Despite the fact that the FD interest is not paid, tax experts say it is often advisable to report it in the year of accrual.
“It would be recommended that the investor offer interest accrued to tax on a yearly basis. This is mainly because, the investor might fall in a low-income tax bracket and consequently the yearly interest accrued would also be subjected to tax at a lower tax rate. Also, since the bank would deduct TDS on the interest accrued every year and which would be reflected in Form 26AS in such year, this may also avoid any inconsistency between the interest offered to tax every year and TDS deducted on such interest,” said by an expert.
“However, on the other hand, if the investor provides the entire amount of interest to tax in the year of receipt, this may push the investor towards the higher income tax bracket and he may be subjected to tax on such interest income on a higher tax rate,” said the expert.
If the interest earned for the year exceeds a certain threshold limit, banks are allowed to deduct TDS at a rate of 10%. Senior citizens receive Rs 50,000, while non-senior citizens receive Rs 40,000.
In case, that your interest received during the year exceeds the threshold limit, the bank will deduct TDS, which will be reflected on your 26AS. As a result, there is a possibility of a mismatch between 26AS and ITR.
If the taxpayer also wishes to pay the tax in the year in which the FD matures, the TDS can be carried forward. “In such a situation there’s an option in ITR form to mention the year of TDS amount and the TDS credit amount claimed out of that (rest can be carried forward). This should be filled very carefully. Alternatively, if there’s a mismatch of income and TDS and it’s flagged by the Department, then the taxpayer can file an explanation to the Department,” said the expert.
“Such a person who opts for FD interest taxation on receipt basis, should while filing their return for earlier years show in the TDS schedule that such TDS is carried forward. As such, credit for all TDS carried forward would be available in the year of maturity when the interest is offered to tax,” said by expert.
If your income is below the exempted limit, you can escape TDS by filing Form 15G/H. Form 15H is for senior citizens, and Form 15G is for non-senior citizens.
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