Tax implication of fixed deposits

Fixed deposits will earn a particular rate of interest. This interest amount will be taxed under the Income Tax Act. It is considered under the head of income from other sources. The entire amount of the interest earned is taxable, so the gross amount of the interest has to be taken as income for the period under consideration. Earlier, there was a benefit of a deduction for the interest earned on fixed deposits but this benefit no longer exists.

In terms of investment, there is no benefit for investing in a fixed deposit except for investments in a specific type of deposit. These are tax-saving deposits that are offered by banks under a special scheme. The difference in these deposits is that the entire amount of investment in the deposit has a lock-in period of 5 years from the date of the deposit. The tax benefit arises in the form of a deduction from the taxable income of the individual, up to a sum of Rs 1 lakh in a financial year. This means that the investor can choose this route for the purpose of completing his/her required tax-saving investments. Investing in any other type of fixed deposits will not enable the investor to earn this kind of tax benefit so this has to be taken into consideration.

The amount invested in a fixed deposit is a debt investment and hence the amount of capital will be returned at the time of maturity of the deposit. This has no tax implication because of the fact that it is the original amount invested that is coming back to the investor, and not some additional income being generated.