The biggest disadvantage of FDs is that the interest earned is subject to taxation. This eats into the returns.
Taxed as per income bracket
The interest earned on the FDs is added to the depositor's income and taxed as per income bracket. This reduces its attractiveness, especially for those in the highest tax bracket.
Pay tax even if bank cuts TDS
The bank will cut the tax at source (Tax Deducted at Source) before paying the interest, if the interest exceeds Rs 10,000 in a financial year. But this is at the marginal rate of 10%. If you are in the higher tax bracket, that is 20% or 30%, make sure that you pay the additional interest before filing your tax returns. This is a common mistake most depositors do. It is a hassle if you receive a notice from the Income-Tax department for non payment of taxes. You will have to prove that not paying the tax was not deliberate and you may have to pay tax plus the penalty for the delay.
For ensuring that the bank has deducted TDS on your FD by checking Form 26AS. But sometimes if the bank deducts TDS but fails to submit the same to the I-T department, you may still get a notice.
If your PAN card details are not updated with the bank, the TDS will be deducted at 20%. And if you are in the 10% tax bracket, this will mean having to file for refund while filing tax returns, which can be a hassle. These are some of the things to keep in mind.
Form 15G and 15H
If your income is below the taxable limit and you have no then submit Form 15G to avoid TDS. For senior citizens whose income is below the taxable limit the form is 15H.
Reduce your TDS
You can also reduce your TDS by spreading your deposits across several banks so that the interest earned in a financial year remains less than Rs 10,000. But this will only reduce the TDS. You will still have to pay income tax as per your tax bracket.