Interest earned on fixed deposits (FDs) and Kisan Vikas Patra (KVP) remains taxable under the Income Tax Act 2025, which became applicable from 1 April 2026. According to reports from Mint and The Economic Times, interest from both investment instruments falls under the 'Income from Other Sources' category and is chargeable at the taxpayer's applicable slab rates. This tax treatment applies regardless of whether the interest is paid out during the financial year or accumulated within the deposit. The latest deposit rates from UCO Bank show competitive returns across various tenures, with senior citizens receiving additional benefits of up to 1.25% above general customer rates for deposits above ₹10 crore. The rates vary significantly across different deposit periods, with 1-year deposits offering 7.10% for general customers and senior citizens receiving 5.90%.
Under Section 393 of the Income Tax Act 2025, banks are required to deduct tax at source (TDS) on interest earned from fixed deposits once the prescribed threshold is crossed. As reported by The Economic Times, the threshold for interest paid or credited by a banking company, eligible co-operative bank or post office on specified deposits is ₹50,000 for individuals other than senior citizens and ₹1 lakh for senior citizens. The applicable TDS rate is generally 10%, subject to relevant provisions. This applies even to cumulative fixed deposits, where the interest is added to the deposit and not paid out during the financial year. However, TDS serves only as a method of collecting tax in advance and does not determine the final tax liability. According to Nishant Shanker, Tax Controversy & Dispute Resolution at Navraj Global Advisors, 'Interest earned on FDs and Kisan Vikas Patra (KVP) is taxable under the head 'Income from Other Sources' and is chargeable at the taxpayer's applicable slab rates under the ITA 2025, with TDS applicable once prescribed thresholds are crossed.
Kisan Vikas Patra is treated differently for tax deduction at source compared to fixed deposits. According to The Economic Times, KVP interest is not subject to TDS, though it remains fully taxable and must be disclosed in the income tax return. As explained by Nishant Shanker, 'KVP interest is not subject to TDS, though it remains fully taxable and must be disclosed in the income tax return'. The current KVP interest rate is 7.5% per annum, compounded annually, and the investment doubles in 115 months, or nine years and seven months. Taxpayers should note that TDS is merely a mode of tax collection and does not determine the final tax liability, with the entire taxable interest requiring reporting while filing the ITR. The absence of TDS on KVP should not be mistaken as a 'tax exemption', as reported by The Economic Times, with investors needing to account for the income appropriately while calculating their final tax liability.
A significant difference between FDs and KVP lies in their tax-saving provisions under Section 80C. According to The Economic Times, an eligible five-year tax-saving FD can qualify for a deduction under the applicable Section 80C provisions, subject to relevant conditions, while KVP does not offer this deduction. This makes KVP less attractive for investors seeking tax benefits compared to eligible tax-saving FDs. The comprehensive understanding of these tax treatment differences can help investors plan their finances more effectively and facilitate proper compliance with the Income Tax Act 2025 provisions.
The absence of TDS on KVP should not be mistaken as a 'tax exemption', as reported by The Economic Times. Any investor in these schemes should report their gains appropriately while filing their ITRs. Similarly, taxpayers who earn interest from fixed deposits should never presume that the 'tax deducted at source' by the banking institution fully resolves their tax liability, as the final tax liability primarily depends on an individual's applicable tax slab and total income. Most importantly, TDS is not the same as tax exemption, with investors needing to consider the taxability of their interest income while filing their income tax returns. This comprehensive understanding of tax treatment can help individuals plan their finances more effectively and facilitate proper compliance with the Income Tax Act 2025 provisions.
