INTEREST earned on your fixed deposit (FD) is taxable. So, don't be surprised if your bank deducts tax before crediting the amount to you. We tackle a reader's query on the subject.

According to my ICICI Bank statement, they deducted Rs 1, 208 (tax deducted at source or TDS) on an FD of Rs 1,50,000 at an interest rate of 9.5 per cent for one year and 23 days.

What's the taxable income for a woman who is a non-working individual? Also, is the interest received on an FD treated as income for that financial year? If I do not fall into the taxable bracket, can I recover deducted tax from the income tax?

-- Manju, Bangalore

Read: Post TDS, there's more tax to pay!

For a woman tax payer below the age of 65 (working or non-working), income will be taxable if it exceeds Rs 1,45,000 for financial year 2007-2008.

The threshold limit has been increased to Rs 1,80,000 for financial year 2008-2009. Interest on bank deposits and on savings accounts will be considered a part of the taxable income.

The interest received on a bank FD is considered as income. However, refund of the principal amount of the FD is not an income. It is a capital receipt. You could, nevertheless, be asked to explain the source of funds for the FD in the first place.

If you are unable to prove the genuineness of that source, then it's possible that the income tax authorities may treat the entire amount of FD as an unexplained asset and tax the same (refer to Section 69 of the Income Tax Act)

Smart tip 1: If your total income for any year does not exceed the threshold limit for that year and if there is some amount of TDS from your income, then you can always file your returns for that year and claim the refund of the TDS.

In your case, the tenure of the FD covers two financial years.

Smart tip 2: You may as an option, decide to offer the interest for the period beginning from the date of starting of the FD up to the succeeding March 31, as the income of that first year and the balance interest for the balance period as the income of the subsequent year. This way, the burden of the entire income being taxed in one year gets reduced.

Illustration: Vaibhav Shirke

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