Fixed deposits-- When to pay Tax

When one invests in fixed deposits, the money is received by us only at the time of maturity. Maturity can be anytime and is dependent on the time horizon of your deposit. A lot of times this maybe more than 1 years.

So, I was recently in a situation where i needed to answer when the tax on the interest earned is payed. I was under the understanding that it is payable at maturity. However, that is NOT TRUE.

The interest earned is liable for tax in the same financial year. A lot of times banks deduct TDS at 10% every year while they make the calculation on the interest earned by you on your deposits.

But the rule is simple, the interest needs to be shown as income and income tax payed against it. (For people who are below the 10% income tax bracket, like housewives, you can read the earlier post on how you can avoid getting the banks to charge TDS and then avoid the hassle of claiming tax back from the IT dept by reading http://simplefinancialsense.blogspot.com/2010/04/fixed-deposits-and-tax-deducted-at.html)

The banks also will send you a TDS certificate which you can use to offset your tax liability when you fill in your returns.

Ensure that you correctly show your income to avoid getting into hassles later on.

Happy Investing

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