Archive / Investment Adviser (Level 2) / Taxation of Other Products
nism-series-xb-bank-fixed-deposit-interest-taxation[ INVESTMENT ADVISER (LEVEL 2) ]
How is interest income earned from a Bank Fixed Deposit (FD) taxed in the hands of an individual investor?
[ A ]Added to the investor's total income and taxed at their applicable slab rate, subject to TDS if the interest exceeds the prescribed threshold[ CORRECT ]
[ B ]Exempt from tax up to Rs. 10,00,000 of interest per year
[ C ]Taxed at a flat 20% regardless of the investor's income slab
[ D ]Treated as a capital gain and taxed under Section 198 of the Income-tax Act, 2025 (the erstwhile Section 112A of the Income-tax Act, 1961)
Takeaway
Option A is correct: FD interest is added to total income and taxed at the investor's slab rate, subject to TDS.
Derivation
Interest earned on a Bank Fixed Deposit is classified as 'Income from Other Sources' under the Income Tax Act and is added in full to the investor's total income, then taxed at their applicable slab rate — there is no concessional or flat rate for FD interest. The bank deducts TDS under Section 393(1) of the Income-tax Act, 2025 (the provision was Section 194A under the erstwhile Income-tax Act, 1961) once interest paid to a depositor in a financial year crosses the prescribed threshold (a higher threshold applies for senior citizens), but TDS is only a provisional deduction — the investor's final tax liability is still computed at their own marginal slab rate when filing the return.
Why the others fail
B — Exempt from tax up to Rs. 10,00,000 of interest per year
There is no such blanket exemption for FD interest — the exemption available under Section 153 (the erstwhile Section 80TTA/80TTB) applies only to specified small savings/senior-citizen interest, at far lower limits.
C — Taxed at a flat 20% regardless of the investor's income slab
FD interest is added to total income and taxed progressively at the investor's own slab rate — it does not carry a flat concessional rate the way certain capital gains do.
D — Treated as a capital gain and taxed under Section 198 of the Income-tax Act, 2025 (the erstwhile Section 112A of the Income-tax Act, 1961)
Section 198 of the Income-tax Act, 2025 (the erstwhile Section 112A of the Income-tax Act, 1961) applies specifically to gains on listed equity shares and equity-oriented mutual funds — FD interest is 'Income from Other Sources', an entirely different head of income.