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Money Jul 12, 2013

Why bank’s TDS process has a bearing on your FD earning

By Firstbiz Editors

If you are looking for guaranteed returns, the humble bank fixed deposits (FDs) are the best because you know the kind of returns you get. But as far as tax deducted at source is concerned,there are a few things about FDs that are a bit complicated, notes a report in theBusiness Standard today.

In fact, the frequency of tax deduction has a bearing on the interest you earn. For instance, if the tax is deducted quarterly, the interest you earn will be lower than when it is done semi-annually and annually. In fact, your earnings will be the highest if your bank deducts tax annually.



For example, net earnings from a one-year FD with a 10 percent interest will be 9.334 percent if the tax is deducted annually, 9.316 percent if it is done semi-annually and 9.307 percent if done quarterly.

This is because when banks deduct TDS quarterly, the tax amount is cut from the principal amount every three months. Accordingly, your interest amount too will decline in each subsequent quarter. On the contrary, if the TDS is cut at the end of the year, the FD earns an interest on a higher balance on the deposit. As per the IT rules, TDS of 10 percent has to be deducted on FD if the interest exceeds Rs 10,000 in a financial year. It, however, does not specify whether the tax should be cut quarterly, semi-annually or annually, thus allowing the banks to do as they please.

Ashish Das, department of mathematics, Indian Institute of Technology, Bombay, in his technical report says that if there was uniformity in the way banks cut tax, it would help customers choose the bank based only on the interest rates. Customers would not have to go through the pain of looking into procedural issues, notes the BS report.

Read the entire Business Standard report here.

by Firstbiz Editors

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