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TDS on Fixed Deposit Interest

Updated on: 19 Jan 2024 | 7 min read

A fixed deposit (FD) is one of India's most popular fixed-return investment options offered by banks, post offices, and other financial institutions. With low risk, you also earn interest on the money you park for a pre-determined duration. However, like most other investment options, earnings from FDs are taxable. Interest earned on FDs is subject to TDS. 
The government charges TDS on certain incomes to collect upfront taxes, like interest from bank FDs. While you report the earned income later, the bank deducts the tax in advance and sends it to the government. Understanding TDS rules is key, as you might be eligible for an exemption. This article explains the TDS rate on FD interest and how to claim an exemption if you qualify.

TDS rate on Fixed Deposit

FDs are an investment scheme offered by banks and other financial institutions where you can earn interest on the money parked for a pre-determined duration. As mentioned above, FDs generate returns through fixed interest.

Depending on the type of FD you have chosen, the interest will either be reinvested upon maturity of the FD along with the principal amount or credited to your bank account on a regular basis. A tax is deducted at source on the interest by the bank and paid to the government.

Section 194A of the Income Tax Act, 1961 (IT Act) deals with the provisions relating to TDS on interest on FDs paid to an Indian resident. The applicable rate of TDS depends on factors such as the amount of interest, the payer, and the recipient's age. Interest earned in a financial year up to certain thresholds is not subject to TDS. The different thresholds that apply are mentioned below:

 

If the interest earned during a financial year is higher than the threshold mentioned above, tax is deducted at source at the rates mentioned below:

 

PayerThreshold Limit (₹) for Senior CitizensThreshold Limit (₹) for Others
Bank, post office, or co-operative society50,00040,000
Any other case5,0005,000

 

RecipientTDS Rate
Indian residents with PAN10%
Indian residents without PAN20%
Non-Resident Ordinary (NRO) Account 30%
Non-Resident External (NRE) AccountExempt

How is TDS on FD calculated?

As mentioned before, TDS is applicable on FDs when the interest earned is more than ₹ 40,000 in a financial year. Let us take an example to understand this better. For ease of calculation, let us assume you are an Indian resident with a PAN card. 

  • The rate of TDS applicable to you will be 10%. If you earn ₹ 20,000 as interest from FD, the TDS would be 10% of 20,000 = ₹ 2,000
  • If you are an Indian resident without a PAN card, the TDS would be 20% of ₹ 20,000, which is ₹ 4,000.

How to Save Tax on FD

The best way to save tax on FDs is by opting for a tax-saving FD. The interest earned on FDs is taxable according to the income tax slab applicable to you. However, the principal amount is eligible for a tax deduction of up to ₹ 1.5 lakh under section 80C of the IT Act. Tax-saving FDs have a lock-in period of 5 years, and withdrawing before the maturity period is not possible, even if you pay penal interest. If that does not work for you, here are some ways you could look to reduce or avoid TDS on regular FDs.

  • Form 15G/15H: Your income from FD is not taxable if it doesn’t fall in a tax slab, i.e., if it is lower than the basic exemption limit. The basic exemption limit applicable to residents and senior citizens is ₹ 2,50,000 and ₹ 3,00,000, respectively (₹ 5,00,000 for super senior citizens). You can claim a TDS exemption through a Form 15H declaration if you are a senior citizen. In all other cases, you can use form 15G.
  • How to Save Tax on FD: Since interest up to the abovementioned thresholds is not subject to TDS, you can avoid TDS by spreading your FDs across multiple banks. Your interest in FDs held with different banks is not aggregated to apply the threshold limit of no tax deduction. However, you still have to pay tax on interest income if it exceeds the basic exemption limit.
  • Timing Your FD Right: Another way to save tax on FD is by timing your FD investments correctly. You may time your FD investment such that the interest earnings are split into two years. For instance, if your fixed deposit tenure is 12 months and your expected earnings are ₹ 40,000, you could start investing after April so that the interest is split into two financial years, and your interest is exempt from TDS.
  • Splitting Your FD: If you are an individual with a HUF (Hindu Undivided Family) identity, you could split your FD investment into two – one under your personal identity and one under your HUF identity so that the interest earnings are split.

Rules for TDS on FD

Below are the TDS rules for FDs in a nutshell.

  • TDS on bank FD is applied if your interest income is more than ₹ 40,000 in a financial year (₹ 50,000 for senior citizens).
  • If your income is not taxable, you can apply for a TDS exemption. 
  • Interest income from tax-saving FDs is also taxable.
  • If joint account holders hold the FD, the primary account holder will suffer TDS, and the secondary account holder will not suffer TDS deductions.

Final Thoughts

Navigating the intricacies of TDS on FD interest can feel like navigating a maze. This guide will give you the knowledge to maximise your returns and minimise your tax burden. Remember:

  • Thresholds matter: TDS only kicks in after specific interest thresholds (₹40,000 or ₹50,000 for senior citizens).
  • Tax-saving FDs offer shelter: Invest for the long term and claim deductions under Section 80C.
  • Exemption forms are your friends: File Form 15G or 15H to skip unnecessary deductions.
  • Strategic timing and splitting: Divide your FDs across banks or years for lower tax impact.

This conclusion summarises the key takeaways and encourages readers to apply the information, leaving them feeling empowered and ready to make informed decisions about their FD investments.

FAQs

What is the TDS rate for FD if I haven’t linked my PAN card with the FD account?

The TDS rate for Indian residents with a PAN card is 10%. If you don’t have a PAN card or the PAN is not linked to the FD account, the TDS amount doubles to 20%. Hence, if you don’t have a PAN card, it is advisable to get one; if you do, you must link it to the FD.

Is tax-saver FD free from TDS?

Tax-saver FD is not free from TDS. Instead, it gives you a tax deduction on the amount you invest in FD for up to ₹ 1.5 lakh. For instance, if your taxable income is ₹ 6 lakh and you invest ₹ 1.5 lakh in an FD, your taxable income could be reduced to ₹ 4.5 lakh after claiming a deduction under section 80C of the IT Act.

How can I check TDS on my FD?

You can check the tax deducted by logging into Form 26AS online. You can also check the FD report, which banks generally provide. You may also directly contact the bank for any further assistance.

Can tds on FD be avoided?

TDS on FD can be avoided in India if your total interest earned in a financial year is below the threshold limit. This limit is ₹40,000 for individuals below 60 years old and ₹50,000 for senior citizens. So, if you keep your FD interest income below these limits, you won't have to pay any TDS.

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