TDS on FD: How Can You Save Tax on Fixed Deposit Interest?

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TDS on FD: How Can You Save Tax on Fixed Deposit Interest?

TDS on FD: An Overview

There are various types of investment options available in the financial market to earn returns and fixed deposit investments are one of the most popular and safest forms of investment among Indian investors. It offers a fixed interest rate, making it a safe investment option for investors. However, your bank or post office will deduct a certain percentage of TDS if the interest you earned on a fixed deposit exceeds the minimum amount. So, as a savvy investor, you should be aware of this information which might affect your investment. In this article, we are going to learn about what is FD, TDS on interest on FD and how can you decrease the tax liability on your fixed deposit. 

What is a Fixed Deposit?

FD or Fixed deposit is one of the safest and most preferred investment options among Indian investors because it offers a fixed rate of returns. You can invest your savings in fixed deposits with financial institutions like banks and post offices. You have to invest a lump sum amount of money that gets locked up till the end of the tenure of your fixed deposit. The tenure of the fixed deposit is chosen by the policyholders and it can be of any duration, depending on the options provided by the financial institution. However, the interest rate offered on fixed deposits is higher than in saving accounts and can be different on different tenures. The interest rate on FD is fixed throughout the tenure of the scheme. When the tenure is completed, you get to receive the interest earned on the fixed deposit along with the principal amount. 

Key Takeaways

  • TDS at 10% is deducted from your account If the interest earned on the fixed deposit exceeds INR 40,000. 
  • TDS is levied on an individual if they come under the category of taxable income. 
  • Fixed Deposit offers a fixed rate of interest to its policyholders. 

How Can I Save Tax On Fixed Deposits?

The interest earned on fixed deposits is 100 percent taxable. If you fall under the taxable income bracket which means you will have to pay tax if your income is more than INR 2.5 lakhs. The income tax which is earned on your annual income has many tax slabs and there is tax percentage for different income groups. TDS means tax deducted at source. For any of your income whose sum is a little higher than that before getting transferred to you, some tax is already deducted from it because the government or income tax department does not have faith that you will declare your whole income. So, TDS is a tax that is deducted in advance. For banks, this limit is 40,000, which means if the interest that they are paying to you is more than INR 40,000 then they will deduct tax from it. 

Financial institutions like banks and post offices deduct TDS at 10% on the interest earned on fixed deposits if you have submitted your PAN card details. If you have not submitted your PAN, then the institution will deduct TDS at a 20% rate. So, make sure to submit your PAN when you open an FD account or a saving account. Policyholders can use Form 15G and 15H to appeal to their financial institution to not opt for a TDS deduction if they fall under the category of nontaxable income. You have to fill out these two forms 15 G and 15 H. individuals who are below the age of 60 then have to use the 15 G form and senior citizens (individuals who are above the age of 60) can use 15 H. you can fill out these forms online and offline. Even if you do not fall under taxable income and TDS is deducted from your account then you will get a refund after one year. All you have to do is file your income tax returns and then you will get a refund. 

If you fall under the category of taxable income, then you cant use 15 G and 15 H forms to avoid TDS on fixed deposit. In this case, you have to plan your fixed deposit in such a way that the interest earned on FD should not cross INR 40,000 if you have your FD account with a bank. So, it is advisable to spread your FD accounts with different banks so that the interest remains below INR 40,000 ( INR 50,000 for senior citizens) to avoid TDS on FD

For example, you have invested a sum of INR 10 lakh in a fixed deposit at a 6% interest rate per annum. After one year, the interest earned on your FD will be INR 60,000. The institution will charge a 10% TDS on interest on FD which means you will be paying INR 6,000. However, you can avoid paying TDS on FD interest by dividing your account between two banks. One thing you need to keep in mind is that spreading your FD accounts with different banks doesn't save you from paying income tax. If you want to save income tax, then you can open FD accounts in the name of your family members. 

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To conclude, if you are a conservative investor then investing your savings in a fixed deposit is a great way to earn stable returns. Since fixed deposits are non-market linked schemes, it is free from volatility and provides a fixed rate of interest. However, investors of fixed deposits have to pay a certain TDS on interest on FD, depending on the tax slab you fall under. So, as a smart investor, you must be aware of the latest rules of fixed deposits or any other forms of investment options. 

  • Can I avoid TDS on FD interest?

  • How can I save tax by investing in fixed deposits?

  • What if the interest earned on my fixed deposit is more than INR 40,000?

  • How can I avoid TDS on FD?

  • How much interest earned on a fixed deposit is tax-free?