How to Save Tax on FD Interest?

While guaranteed return benefits from FDs make them preferred investment options, there is an important tax component to them that’s often overlooked. Simply put, the extra money you earn as interest from FDs is added to your annual income. Thus, these earnings are taxable like all other components of your annual income. While you are liable to pay tax on your fixed deposit interest earnings, there are ways to bypass this liability to a certain extent. Opening a tax-saving FD account is the simplest way to save tax on FD interests.

A tax-saving FD gives you access to tax rebates of up to ₹1.5 Lakhs (annually) under Section 80C of the Income Tax Act 1961. However, to enjoy such fixed deposit tax exemptions, you will have to lock in your lump-sum deposit for at least 5 years. If the 5-year lock-in period is not an issue for you, then the easiest answer to the question ‘how to save tax on FD interest?’ is a tax-saving FD!

You can safeguard your returns from income tax deductions quite easily. Here’s how you can save tax on FD interest earnings: 

• Form 15G/15H

To enjoy tax exemptions on your fixed deposit earnings, you need to submit a self-declaration form or TDS waiver stating that you have zero taxable income. Doing so will prevent the bank from deducting income tax on your fixed deposit interest. Regular tax saver FD holders must submit Form 15G, while senior citizens have to submit Form 15H to avail of such TDS exemptions.  

• Distributing FD

You can also bypass TDS deductions by investing your money wisely. For instance, if you divide the total deposit amount between two different banks, you can easily prevent the earnings from exceeding the ₹40,000 mark. This simple strategising will diffuse the dilemma of how to save tax on FD interest quite easily.

• Timing Your FD Right

A little foresight and planning can also help waive taxes on your fixed deposit earnings. Since TDS is calculated every March, you can align your deposit timings in a way that will prevent interest earnings from crossing the ₹40,000 benchmark. For instance, a 1 year FD of ₹2 Lakhs at 9% interest rate can be booked in September as the fiscal year closes on the 31st of March. By doing so, the interest will be split into two and TDS can be avoided.

• Splitting Your FD

Another easy solution to the ‘how to save tax on FD interest’ is splitting FD deposits between two accounts. In other words, you can start a tax-saving FD under your own account and another one under a HUF account. Since both FDs will be classed under separate accounts, interest accruing on them won’t be calculated as cumulative earnings. 

There are a few things you have to keep note of before you submit scanned copies of the documents offline. They are:

• You have to produce the original documents for verification and a scanned photocopy of all the documents.

• The form has to be filled in capital letters using a black ink pen (varies from one financial institution to another)

• Telephone number and permanent address have to be provided compulsorily.

• In case of overwriting, kindly countersign.

• You can submit any other address proof or identity proof other than the ones mentioned above subject to the chosen financial institution’s norms.

Since FD returns are classified under the ‘Income from Other Sources’ category of the Income Tax Act 1961, these earnings are subject to tax deductions. Taxes on FD interest earnings are applicable if the interest accrued on the deposited amount exceeds the ₹40,000 mark in a given fiscal year. In other words, you can avoid taxation on FD returns if your earnings fall under this stated upper limit.

For senior citizens, this limit for interest earned is ₹50,000. If your earnings do exceed this limit, your bank will deduct 10% from your total interest earnings as TDS. However, you must submit your PAN details to enjoy a 10% deduction rate. Deductions will be made at a rate of 20% if your bank does not have your PAN details. The TDS rate for non-resident Indians is set at 30%. Post TDS deductions, your returns will be taxed as per your income tax slab. 

FDs are not the sole investment instruments you can choose from to enjoy sizable tax rebates. While there are several other tax-saving investment options available in the market, none compare to the safety and assured returns that an FD promises. Compared to market-linked investment options like ELSS, a tax-saving FD remains unaffected by market changes and ensures steady returns for the investor. Let’s take a look at how these FDs fair against other tax-saving investment instruments: 

Factoring in lock-in periods, interest rates and risk parameters, a tax-saver FD emerges as the best investment option, followed closely by a PPF investment. While ELSS is an attractive option - given its high ROI - this market-linked investment instrument is only good for those who can stomach a high risk quotient. Thus, if you’re wondering how to save tax on FD interest without facing any market volatility, a tax-saving FD is your best bet. 

A tax-saving FD can be one of the best tools for someone looking to safeguard his earnings from tax deductions. These saving instruments promise guaranteed returns and freedom from market-linked anxieties, apart from a tax break of up to ₹1.5 Lakhs under Section 80C. You can use an FD return calculator to determine the returns that you will earning.The FD calculator is a simple and easy-to-use tool that will help you know the interest amount that you would earn on your investment based on the amount, tenor and interest rate. Therefore, if you find yourself frequently wondering about how to save tax on FD interest, simply save your money in a tax-saver FD today!