A Fixed Deposit (FD) is a fixed income-generating instrument offered by banks. You deposit your savings or surplus income and, in exchange, enjoy a fixed interest rate for the tenure you choose. Your FD investment stays stable throughout the term as it is not affected by market movements. Moreover, your FD is eligible to enjoy Deposit Insurance and Credit Guarantee Corporation (DICGC) backed insurance of up to ₹5 lakh, which adds to their safety even more.
All these benefits make fixed deposit a zero-risk investment option. However, their tax treatment can impact your overall earnings and hence it’s important to understand it.
Tax on FD interest | A brief overview
As per the Income Tax Act, 1961, the interest earned from fixed deposits is treated as “Income from Other Sources”, and thus, is fully taxable. It is taxed at the individual’s applicable income tax rate, which means the tax burden varies based on your total income in a financial year.
Understanding TDS on interest on fixed deposit schemes
According to the provisions of section 194A, TDS on an FD is applied if the interest earned surpasses the threshold limits in a given financial year. For individuals below 60 years, the limit is ₹40,000 and for senior citizens, it is ₹50,000. The TDS rate is 10% if PAN is provided. If you do not submit your PAN, it goes up to 20%.
If your total income falls below the taxable limit, submit Form 15G (or Form 15H for senior citizens) to the bank. This can help you avoid TDS on interest on FD schemes.
As per the Income Tax Act, the exemption thresholds for various age groups are:
- ₹2.5 lakh for individuals below 60 years
- ₹3 lakh for senior citizens aged 60 to 79
- ₹5 lakh for individuals aged 80 or above
You need to submit 15G/15H forms at the beginning of every financial year. If the bank has already deducted TDS before you could submit these forms, simply file for an Income Tax Return (ITR) to claim the refund.
Tips to minimise your taxability on FD interest
Paying taxes on FD interest income is undoubtedly a responsibility, but there are ways to reduce your tax liability.
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Book a tax-saving FD
Invest in five-year tax-saving fixed deposits to qualify for tax deductions under section 80C of the Income Tax Act, 1961. You can claim a deduction of up to ₹1.5 lakh annually and reduce your taxable income.
INDIE Fixed Deposits by IndusInd Bank can amplify the tax benefits with an impressive interest rate of up to 7.75%. Thus, you get dual advantages, i.e., savings on taxes as well as high returns. Book an INDIE Fixed Deposit today with a 100% paperless process and enjoy premium digital banking services through a single platform.
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Capitalise on age benefits
Banks generally offer competitive FD interest rates and higher exemption limits to senior citizens (above 60 years). The TDS on interest on FD only applies if it crosses ₹50,000 in a financial year. If you are a senior, leverage these age-related perks to reduce the amount of payable tax on FD income and increase total returns.
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Ladder your FDs
Instead of investing a large amount in a single FD, allocate your investments across different FDs, across different financial years. This can help you manage the total interest earned in a financial year and keep it below the TDS threshold. Thus, you can minimise or even eliminate the need to pay TDS.
The bottom line
Tax on FD interest impacts the total returns you get from your investments, which is why you must be informed and strategic. Follow tactics such as dividing your funds across multiple FDs, utilising tax-saving FDs, and submitting Form 15G/15H when applicable to reduce tax liability and protect returns.
So, even though FDs are a secure investment option, their tax aspects still require consideration. By planning and managing your taxes carefully, you can make sure that your FD investments are as profitable as possible.