Earn interest up to 7.95% p.a. by investing in a Bajaj Finance Fixed Deposit | Rated CRISIL AAA/ STABLE and [ICRA]AAA(stable)

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!

Features of a Tax-saving Fixed Deposit

Before seizing this possibility to save tax on FD interest earnings, you should know a little more about the features of such FD schemes. We’ve outlined these key features below:

 

  • Tax-saving deposits come with a minimum lock-in tenor of 5 years. 

  • Premature withdrawals or loans against such FD schemes are not allowed.

  • Tax-saving FDs can be booked at all private and public sector banks (except rural and cooperative banks).

  • Both individuals above the age of 18 years, and HUFs can apply for such schemes. Minors are also eligible for such tax-saving FDs, provided the investment is made jointly with an adult. 

  • Tax-saving FDs can be opened in the ‘single’ or ‘joint’ mode. For the latter, the taxation on FD interest benefits only accrues to the first account holder. 

  • The minimum deposit amount for a tax-saving FD varies from bank to bank, while the maximum deposit amount is capped at ₹1.5 Lakhs. 

  • The interest rate for tax-saving FDs varies from 5.5%-7.25%. Senior citizens qualify for a slightly higher ROI. 

  • The interest generated from such schemes is taxable. This tax on FD interest is deducted at source (TDS) vis-a-vis the investor’s tax bracket.  

  • Such investment schemes offer a flexible interest payout option.

  • A nomination facility is also available with a tax-saving FD plan.

When is FD Interest Taxable?

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. 

How to Save Tax on Fixed Deposit Interest? 

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. 

  • 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. 

Comparison With Other Tax-Saving Investments

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: 

Parameter 

Tax-Saving FD

ELSS

Public Provident Fund (PPF)

National Pension Scheme (NPS)

National Savings Certificate (NSC)

Lock-In Period

5 years 

3 years

15 years

Until retirement at 60 

5 years

ROI

5%-7%

12%-15%

7%-8%

8%-10%

6%-8%

Tax on Returns

Taxable above ₹1.5 Lakhs

Taxable above ₹1.5 Lakhs

Not taxable 

Partially taxable 

Taxable above ₹1.5 Lakhs

Premature Withdrawals

Not permitted 

Not permitted 

Permitted 

Permitted 

Permitted only under certain conditions

Risk 

Low 

Moderate-high

Low

Low

Low

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. 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!

FAQs on How to Save Tax on FD Interest

  • ✔️Is FD interest income taxable?

    Yes. Interest earned from fixed deposits is taxable under the Income Tax Act 1961.

  • ✔️How do I calculate my interest income?

    You can use online interest calculators to ascertain your interest earnings from a particular fixed deposit plan.

  • ✔️How much TDS is deducted on the interest earned?

    TDS rates vary for resident and non-resident Indians. For the former, a 10% TDS rate is applicable, provided the bank has access to their PAN details. If PAN details are missing, TDS will be collected at 20%. For non-residents, a 30% TDS (plus surcharges) rate is applicable.

  • ✔️What is TDS on FD interest?

    TDS or Tax Deducted at Source refers to the tax on your FD interest. It is applicable only when earnings from this investment plan exceed the ₹40,000 (₹50,000 for seniors) benchmark in a fiscal year.

  • ✔️Are premature withdrawals allowed on tax-saving FDs?

    No. You cannot withdraw money from your tax-saving FD before the end of the 5-year lock-in period.

  • ✔️How much tax deductions can be obtained with tax-saving FDs?

    Under Section 80C of the Income Tax Act, 1961, you can enjoy fixed deposit tax exemptions up to ₹1.5 Lakhs with tax-saver FDs.

  • ✔️Who should invest in FDs with tax benefits?

    Anyone who wants to earn decent returns on their investment without weathering market-linked risks should invest in a tax-saver FD.

  • ✔️What range of maturities are offered for Tax Saver Fixed Deposits?

    Most tax-saver FD schemes come with a maturity window of 5-10 years.