Fixed Deposits (FDs) are a popular investment option among individuals seeking stable returns. However, the interest earned on FDs is subject to Tax Deducted at Source (TDS) as per the Income Tax Act. It is essential for investors to understand the TDS implications to avoid surprises while filing their income tax returns. Thus, here is the explanation on how the Tax Deducted at Source on Interest on Fixed Deposits is charged.
What is TDS on Fixed Deposit Interest?
TDS is a mechanism through which tax is deducted at the time of credit or payment of interest by the bank or financial institution. The deducted tax is then deposited with the government. This ensures that tax is collected at the source before the recipient receives the income.
Rates of Tax Deducted at Source on Interest on Fixed Deposits
- For Residents:
- If the total interest earned from FDs in a financial year exceeds ₹50,000 (for individuals) or ₹50,000 (for senior citizens), TDS is deducted at 10%.
- If the depositor does not provide their PAN, the TDS rate increases to 20%.
- For Non-Resident Indians (NRIs):
- TDS is deducted at a higher rate of 30% (plus applicable surcharge and cess) on interest earned from NRO fixed deposits.
When is TDS Deducted?
- TDS is deducted when the interest is credited to the account, even if the FD has not matured.
- If multiple FDs exist with the same bank, the cumulative interest is considered for TDS calculation.
How to Avoid or Reduce Tax Deducted at Source on Interest on Fixed Deposits Interest?
- Submit Form 15G / 15H:
- If your total income is below the taxable limit, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the bank to prevent TDS deduction.
- Distribute Deposits Across Banks:
- Keeping FDs in different banks may help in keeping individual interest earnings below the TDS threshold.
- Invest in Tax-Free Instruments:
- Consider alternatives like tax-free bonds, Public Provident Fund (PPF), or equity-linked instruments if tax liability is a concern.
- Claim TDS Refund While Filing ITR:
- If excess TDS has been deducted, you can claim a refund by filing your Income Tax Return (ITR).
How to Check and Verify TDS Deduction?
- You can check the TDS deducted by viewing Form 26AS on the Income Tax portal.
- Banks also issue TDS certificates (Form 16A), which show the deducted tax details.
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Fixed Deposit Income Tax Exemption
Fixed deposits (FDs) are a popular investment choice in India, providing guaranteed returns and financial security. Though the interest earned on FDs is subject to tax, several exemptions and deductions can help you reduce your taxable income:
- Tax Saving Fixed Deposits under Section 80C
Investing in a 5-year tax-saving FD allows individuals to claim deductions under Section 80C of the Income Tax Act. You can deduct up to ₹1.5 lakh in a financial year, reducing your taxable income. These FDs come with a mandatory lock-in period of five years, making them ideal for long-term savings. - Section 80TTB for Senior Citizens
Under Section 80TTB, senior citizens (60 years and above) can avail of a tax exemption of up to ₹50,000 on interest earned from fixed deposits. This benefit extends to FD interest from banks, post offices, and cooperative societies engaged in banking. - TDS Exemption Limits
The government has increased the TDS exemption limit for FD interest income in the financial year 2025-26. TDS will not be deducted on interest income up to ₹50,000 for regular citizens and ₹1 lakh for senior citizens. However, interest exceeding these amounts will attract TDS at a 10% rate.
Income Tax on Interest from Fixed Deposits
Interest earned from fixed deposits is considered taxable income. Here’s how it’s taxed:
- Tax Slab Application
Interest income from FDs is added to your total income and taxed according to your applicable income tax slab. This means that the FD interest is subject to the same tax rates as other sources of income. - TDS on FD Interest
Banks deduct TDS at the rate of 10% if the FD interest income exceeds ₹50,000 for regular citizens or ₹1 lakh for senior citizens in FY 2025-26. You can avoid TDS by submitting Form 15G or Form 15H (for senior citizens) if your total income is below the taxable threshold. - Advance Tax Payments
If your total tax liability exceeds ₹10,000 after considering TDS, you are required to pay advance tax in four installments. This ensures that you don’t end up with a large tax bill at the end of the year.
Summary
While fixed deposits offer safe returns, the interest earned on them is subject to taxation. However, there are various exemptions, deductions, and TDS thresholds available to reduce the tax burden. By taking advantage of these provisions, you can optimize your tax liability related to FD interest income.
Conclusion
Understanding the implications on Tax deducted at source on interest on fixed deposits is crucial for financial planning. By utilizing available exemptions and planning investments wisely, one can effectively manage tax liabilities and optimize returns. Always ensure to check TDS deductions and file income tax returns accordingly to claim any refunds if applicable.
