ITR Filing 2025: Income Tax Implications on Time Deposits

A time deposit, such as a fixed deposit or post office time deposit, is a popular investment option that offers guaranteed returns over a fixed tenure. While there is no tax at the time of investment, the interest earned on such deposits is fully taxable under the head “Income from Other Sources.” Additionally, tax is deducted at source (TDS) if the interest exceeds the specified threshold. Certain 5-year tax-saving time deposits may qualify for deduction under Section 80C. Understanding the income tax implications of time deposits is essential for effective tax planning and compliance.

The purchase of a time deposit (like a fixed deposit, recurring deposit, or post office time deposit) does not attract income tax at the time of investment. However, it has tax implications in the following ways:

✅ 1. No Tax at the Time of Purchase

There is no income tax liability when you invest in or purchase a time deposit, whether from a bank, post office, or financial institution.

💸 2. Tax on Interest Income

a. Interest is Taxable

The interest earned on time deposits is fully taxable under “Income from Other Sources.”
It is taxed as per your applicable income tax slab rate.

b. When is it Taxed?

Interest is generally taxed on accrual basis (every year, even if reinvested).
Some banks provide cumulative FDs — still, you need to show accrued interest every financial year.

📃 3. TDS (Tax Deducted at Source)

Particulars	Bank/Post Office FDs
TDS threshold	₹40,000 (₹50,000 for senior citizens)
TDS rate	10% (if PAN is furnished), otherwise 20%
Section applicable	Section 194A of the Income Tax Act

If the total interest in a year exceeds the threshold, the institution will deduct TDS.

🧾 4. Exemption under Section 80C (If Eligible)

Only 5-Year Tax-Saving FDs (with lock-in) from specified banks/post office are eligible for deduction under Section 80C, up to ₹1.5 lakh in a financial year.
Normal time deposits or FDs do not qualify for deduction under 80C.

🧮 Example

You invest ₹2,00,000 in a 3-year fixed deposit at 6.5% interest:

Every year, interest of ₹13,000 is taxable income.
If total interest across all FDs crosses ₹40,000 (or ₹50,000 for senior citizens), TDS will be deducted.

📝 Tax Planning Tips

Submit Form 15G/15H if your income is below the taxable limit to avoid TDS.
Consider splitting FDs across family members with lower income to optimize tax.

Please share