Myth: Interest on fixed deposit is not taxable
This is incorrect. People have an assumption that interest on fixed deposit is exempt same as interest on savings bank account. But it is wrong. Interest on savings account is exempt under section 80TTA upto Rs 10000/- and any interest above in saving account will be taxable as per tax slab. Ssection 80TTA deals with exemption for saving account interest and there is no where mentioned that interest on fixed deposits or time deposits are tax free.
In fact, in Section 80TTA also there is a limit on interest on savings account. It is exempt upto Rs. 10000/-. After that it is taxable and the whole amount of interest on fixed deposits is taxable so no deduction for interest on fixed deposit. If you receive the lump sum amount on maturity; even in this case you need to pay tax for the interest that you are liable to get.
Section 80TTA provides deduction to an individual or a Hindu undivided family in respect of interest received on deposits (not being time deposits) in a savings account held with banks, cooperative banks and post office. The deduction is restricted to Rs 10,000 or actual interest whichever is lower.
It is also proposed to provide that where the income referred to in this section is derived from any deposit in a savings account held by, or on behalf of, a firm, an association of persons or a body of individuals, no deduction shall be allowed under this section in respect of such income in computing the total income of any partner of the firm or any member of the association or any individual of the body.
The section is applicable with effect from April 01, 2013 and will apply from AY 2013-14 and onwards.
Hence from the above provision, it is clear that interest from fixed deposits is taxable and also TDS @ 10% shall be deducted, if it exceeds Rs. 10000/-.