FD interest — do I pay tax every year or only when it matures?

Question

Hi, I'm Sanjay Reddy, working in Hyderabad, salary around ₹72k in hand. I opened a 3-year FD last year for ₹3 lakhs in SBI at 6.8%. My CA friend said tax is applicable every year but my uncle who's been doing FDs for decades says you only pay tax when you break the FD or it matures. Now I'm genuinely confused who's right.

I filed my ITR last year and I did NOT include any FD interest because I thought it's only taxable at maturity. Now worried if I made a mistake and will get a notice from IT department. Also the bank deducted some TDS, does that mean my job is done or do I still need to declare something?

Can someone please clarify how this actually works? I don't want any IT notice later. Thanks.

Answer 1

Honestly, your CA friend is right, and this is one of the most common mistakes people make with FDs.

Here's how it actually works. FD interest is taxable on an **accrual basis**, not on maturity. Meaning, whatever interest gets accrued in a financial year — April to March — that amount has to be declared as income in that year's ITR, even if you haven't received a single rupee in hand yet. This applies to all banks including SBI, HDFC, ICICI, everyone.

Your uncle's logic made sense in an older, simpler world. But that's not how the Income Tax Act works.

Now about the TDS — this is the part most people misunderstand badly. Bank deducting TDS does NOT mean your tax obligation is over. TDS is just an advance tax the bank pays on your behalf. If your total income puts you in the 20% or 30% slab, but the bank deducted only 10% TDS (which is the standard rate), you still owe the difference. And if you haven't declared the interest at all in your ITR, that's a bigger problem.

What you should do right now:

1. Log into your SBI net banking or visit the branch — download Form 26AS and also the Annual Information Statement (AIS) from the IT portal. Both will show exactly how much TDS was deducted and what interest was reported.

2. Check how much interest accrued in FY 2022-23 on your FD. SBI usually gives a certificate for this.

3. File a revised ITR if the window is still open, or at minimum be ready to explain it. For FY 2022-23, the revised return window may have closed, but if it's for FY 2023-24, you still have time.

4. Going forward, every April just pull your FD interest certificate from the bank and add that number under "Income from Other Sources" in your ITR.

One more thing — if your total income including salary is under ₹5 lakhs after deductions, you might still be in a no-tax zone. But you still need to declare it.

My clear recommendation: get your AIS right now, compare what's shown there vs what you filed, and if there's a mismatch, talk to a CA to file a revised return before any notice lands.

Answer 2

Arun's answer is mostly correct but I want to add a slightly different angle because I think people stress too much about this.

Yes, technically FD interest is taxable on accrual every year. But here's the practical reality — if TDS has already been deducted by SBI at 10%, and your tax liability on that interest is also 10% (meaning you're in the old regime 10% slab situation or effectively close to it), the actual *additional* tax you owe might be very small or even zero.

The real issue is only when there's a **gap between TDS deducted and your actual tax slab**. If you're in the 30% bracket on your total income, yes you owe more. But if the numbers are small, IT department isn't going to send you a notice over ₹500 extra tax.

Also — and this is important — if your FD interest for the full year is below ₹40,000 (₹50,000 for senior citizens), the bank won't even deduct TDS. In that case you 100% need to declare it yourself because there's no TDS trail.

The thing I'd actually focus on: submit Form 15G to your bank if your total income is below the taxable limit. This stops TDS deduction entirely and keeps things clean. SBI, Canara, all banks accept this at the start of the financial year.

Don't panic about past years if the amounts are small. But going forward, just declare it properly every year. It's literally one line in your ITR under 'Other Sources'. Takes two minutes.