The benefits FDs provide to senior citizens

Source: Live Mint

Unlike market-linked instruments such as mutual funds, you can be fairly certain about the returns from a fixed deposit (FD)

Fixed deposits (FDs) are often the preferred instruments for senior citizens not only because of ease of transaction but also because they provide some extra benefits to the elderly such as higher interest rate and tax benefits. The other attractions are fixed returns and periodic income. Unlike market-linked instruments such as mutual funds, where you do not know the returns you will earn over a period of time, you can be fairly certain about the returns from an FD. Depositors can choose to get interest payments monthly, quarterly or at the end of the tenure.

Higher rate

Most banks offer a 50 basis points (bps) higher interest rate on deposits made by senior citizens. For instance, on 31 July, State Bank of India’s five-year FD was giving an interest of 6.85% to individuals and 7.35% to senior citizens.

One basis point is one-hundredth of a percentage point.

Extra tax benefit

A major benefit that senior citizens get is in the tax treatment on earnings from FDs.

Under Section 80TTA of the Income Tax Act, interest earned up to ₹ 10,000 from all savings bank accounts is tax exempt. This exemption is available to assessees up to 60 years of age. Earlier, the Section also included senior citizens, but now there is a separate section on deduction for senior citizens on deposits.

Union Budget 2018-19 added a new sub-section, 80TTB, under which senior citizens can claim deduction up to ₹ 50,000 on interest earned from bank deposits.

While under section 80TTA the interest earned only from savings account deposits was exempted for senior citizens, under section 80TTB interest from all kinds of bank deposits would be exempted.

Remember that exemption under the new sub-section 80TTB is available only to senior citizens who are residents of India.

No TDS till interest earning of ₹ 50,000

A bank deducts tax at source (TDS) if the interest income from a regular FD exceeds ₹ 10,000. As per the latest changes to the IT Act, TDS will not be charged to senior citizens if their interest income is less than ₹50,000. However, if the interest income crosses ₹ 50,000 in a year, banks will deduct TDS on the entire interest income.

Banks deduct TDS at the rate of 10% where depositors have furnished their Permanent Account Number (PAN) and at the rate of 20% in cases where no PAN is provided.

So, from 1 April 2018, if a senior citizen’s annual interest income from bank FDs were to be ₹ 48,000, no TDS would be applicable. But if the interest income were to be ₹55,000, a TDS of ₹ 5,500 (10% of ₹ 55,000) would be deducted by the bank.

This deducted amount becomes a part of the total tax paid by you. In case your tax liability is lower than you have paid, you can claim a refund while filing your tax return.

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