How to Save Tax on FD Interest?

Learn investment strategies to save tax on the interest earned on FDs.

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While fixed deposits (FDs) are popular for their guaranteed returns, remember they come with a tax bite. The interest you earn adds to your taxable income. However, there are ways to minimise the tax burden on your FD earnings.

How to Save Tax on Fixed Deposit Interest?

Here are a few ways you could save taxes on FD interest earnings:

1. Utilise Form 15G/15H

If the total income falls below the taxable limit, those under 60 years of age must submit Form 15G to the bank. If you’re a senior citizen, you need to submit Form 15H instead. These forms declare your non-taxable status and prevent the bank from deducting TDS on your FD interest.

2. Distribute FDs Across Banks

Strategically distribute your FDs among different issuers to ensure the interest earned by them is below the ₹40,000 threshold, effectively avoiding TDS. This limit is set at ₹50,000 for senior citizens.

3. Time Your FD Investments

Plan your FD investments to align with the financial year. For instance, consider opening a 1-year FD in September to split the interest earned across two financial years, potentially keeping it below the TDS deduction limits.

4. Split FDs Between Accounts

Consider opening FDs under different account types, such as a personal account and a Hindu Undivided Family (HUF) account. This compartmentalises the interest earned, thereby reducing tax implications.

A tax-saving FD gives you access to tax deductions of up to ₹1.5 Lakhs (annually) under Section 80C of the Income Tax Act, 1961. However, to enjoy this tax exemptions, you will have to lock-in your FD for 5 years.

When is FD Interest Taxable?

As FD returns fall under the 'Income from Other Sources' category under the Income Tax Act, they are liable for tax deductions. Taxes on FD interest earnings are applicable if the interest accrued on the deposited amount exceeds the threshold mark in a given fiscal year.

If your earnings do exceed this limit, the issuer will deduct 10% from your total interest earnings as TDS. To avail of this rate, you must submit your PAN details. However, not providing these details will lead to a 20% deduction of taxes.

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.

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What is TDS on FD interest?

Tax Deducted at Source (TDS) is a tax that is deducted by the bank from your FD interest earnings at the time of credit. The current TDS rate on FD interest is 10%.

What is the maximum amount of tax deduction I can get on FD interest?

The maximum amount of tax deduction you can get on FD interest depends on whether you invest in a regular FD or a tax-saver FD.

Regular FDs: No tax deduction on the interest earned
Tax-saver FDs: Claim a deduction of up to ₹1.5 Lakhs under Section 80C of the Income Tax Act, 1961

What happens if I don't submit Form 15G/15H?

If you don't submit Form 15G/15H and your FD interest exceeds the threshold, the bank will deduct TDS at the rate of 10% on your interest earnings. You can, however, claim a refund of the TDS deducted by filing your income tax return.