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TDS on cumulative FDs: Your money loss is more than the tax deducted

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Are you among those depositors who think that the deduction of TDS (Tax Deduction at Source) on your fixed deposit is not a big deal? Think again as the maturity value of your cumulative FD decreases by more than the total TDS on the FD over its entire tenure. Here is what you should know about the impact of TDS on the returns on your cumulative FD.

How maturity amount of FD is calculated

The maturity amount that is printed on your cumulative Fixed Deposit Receipt (FDR) does not take into account the impact of tax that may be deducted (TDS) if the interest earned is more than the government specified threshold. What this means is that the maturity amount printed on your FDR includes the additional interest earned due to compounding of interest even on the TDS amount as it is based on default assumption that no TDS will be deducted. Therefore, entire calculation changes if TDS is deducted.

When the whole is greater than the sum of its parts

Normally, TDS on a cumulative FD is automatically deducted by the bank if the interest on the FD crosses a threshold specified by tax laws. Currently, this threshold is Rs 50,000 for senior citizens and Rs 40,000 for non-seniors if the FD is held with a bank. However, if the FD is held with a non banking company the threshold for interest amount is Rs 5000 for deduction of TDS.

If TDS is deducted from the interest earned on a cumulative FD in a given financial year, the FD not only loses the TDS amount but also the compound interest it would have earned throughout the remaining tenure of the deposit.

So, the actual maturity amount that you would receive will not be the maturity amount shown in FDR minus the TDS amount but it will be further reduced by the compound interest that would have been earned on the amount of TDS had the TDS not been deducted.

For instance, if you book a Rs 10 lakh cumulative FD for 5 years in a bank at Rs 6.15% annual interest rate, you will get a Fixed Deposit Receipt with maturity amount of Rs 13.57 lakh. However, it is also mentioned that the maturity may vary depending upon TDS.

As a result, a total amount of Rs 35,234 will be deducted as TDS during the 5-year term of the FD held by senior citizen in bank. If you reduce this amount from the maturity amount of Rs 13.57 lakh mentioned on FDR it comes to Rs 13.22 lakh.

However, the actual amount that you would receive will be much less which is Rs 13.17 lakh – a loss of Rs 4,729. This loss is just because the amount deducted as TDS did not earn compound interest subsequently during the term of the FD.

How your FD loses more due to TDS

Scenarios

Case 1

Case 2

Case 3

Principal Amount

Rs20 lakh

Rs 15lakh

Rs 10 lakh

Annual Interest Rate

5.50%

6.00%

6.15%

Tenure (Years)

2

3

5

Maturity (No TDS)

Rs 22.31 lakh

Rs 17.93 lakh

Rs 13.57 lakh

Maturity (TDS @10% per annum)

RS 22.07 lakh

Rs 17.62 lakh

Rs 13.17 lakh

Total TDS deducted

Rs 22,985

Rs 29,109

Rs 35,234

Loss due to non-compounding of TDS

Rs 1,034

Rs 2,333

Rs 4,729

Assumptions: FD in a bank starts from April 1; Interest is compounded quarterly; TDS is deducted if interest goes above Rs 40,000 in Case 1 and Case 2, and Rs 50000 (senior citizens) in Case 3 in a financial year; one leap year in Case 3

How to Prevent this undesired loss

Here is how you can easily prevent this loss if the fixed deposit amount is not very big.

Senior Citizens should take form 15H seriously

The impact of TDS deduction becomes important for people who can prevent the deduction of TDS. There are many senior citizens who primarily depend upon FDs to manage their finances during retirement and are not required to pay income tax. They can easily prevent this TDS deduction. If your taxable income is below Rs 5 lakh which means your tax liability is nil, you do not need to pay TDS on your FDs. You can just fill the Form 15H in your bank to prevent any TDS on your FD .

Others need to fill Form 15G to prevent TDS

In case of those who are not senior citizens but their total taxable income is below the basic exemption limit of Rs 2.5 lakh, they can also fill Form 15G to prevent deduction of TDS on their FDs.

Spreading your FDs helps you in avoiding TDS

Non- senior citizens whose taxable income is above the basic exemption limit but below Rs 5 lakh, cannot use Form 15G to avoid TDS even though their tax liability is nil after the rebate under section 87A. In such a case you can spread your deposits across different banks to prevent TDS deduction. This will save the undesired hassle of getting TDS deducted then claiming refund while filing ITR.

Others who are required to pay income tax, have the option to spread their FDs across different banks to avoid TDS. Though they will have to show this income in their ITR and pay the required income tax later, they can save the preventable compounding loss.

At present when bank FD interest rates are mostly below 7%, putting FDs below Rs 5 lakh in different banks can help you avoid TDS as well as enjoy the Rs 5 lakh insurance cover on bank deposits.

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