Tax saving Fixed Deposit - How fixed-income investments are taxed Being aware about taxation will help you manage returns better Taxation shouldn't be the primary reason for choosing an investment product. These choices should be based on financial objectives. Nevertheless, being aware about taxation will help you manage returns better. Here is a look at how fixed-income products are taxed. Fixed Deposits (FD) Interest earned on an FD is taxable as per your income tax slab. So, any interest earned on the EDs is added to your overall taxable income and taxed along with it. For instance, if your FD gives you 9% return and your income is taxed at 10%, your net return will be 8.07%; at an income tax rate of 20% your net return will be 7.15% and at a tax rate of 30% your net return will be 6.22% (returns calculated after taking into account education cess of 3%). je income tax return and tax will be calculated The interest earned has to be disclosed when you accordingly. The bank may levy tax deducted at source (TDS) at 10% if the interest earned on a ED exceeds Rs.10,000. Fixed-Income Funds For all mutual funds, you have the option to choose between the dividend option (where you get some of the return paid out regularly as dividends) and the growth option (returns get accumulated and paid out when you redeem the money),In case of the dividend payout, the dividend distribution tax is deducted by the fund house itself. For all fixed-income funds, the base dividend distribution tax rate is 25%, and the effective rate after taking into account surcharge and cess is 28.84%. ‘And if you opt for the growth option and receive accumulated income at redemption, you will be liable to pay capital gains tax (if profits are made). Short-term capital gains tax (STCG) will be applicable for ga '$ On Units held up to a period of 36 months, and for those held for more than 36 ipital gains tax (LTCG) will be applicable. STCG is similar to the FD taxation, where your gains are taxed at your applicable income tax rate. In case of LTCG, for months; long-term both listed and unlisted funds, you can index the cost of your units and then the gains are tax saving Fixed Deposit at 20% (plus surcharge and cess). Indexation is the process of adjusting the cost of purchase according to a price index linked to inflation; this helps in determining cost of purchase based on current inflated value. Bonds and non-Convertible Debentures (NCD) If you hold bonds and NCDs till maturity and earn only through the interest income, it will be taxed as per your income tax rate, However, if you sell or transfer your bond during the life of the security, capital gains tax will apply on any profit earned as a result of this sale. For listed bonds, which are sold? Source: http://www idbi.com/suvidha-tax-saving-fixed-deposit.asp.