TDS on Fixed Deposit Interest

FDs are an investment scheme offered by banks and other financial institutions where you can earn interest on the money parked for a pre-determined duration. As mentioned above, FDs generate returns through fixed interest.

Depending on the type of FD you have chosen, the interest will either be reinvested upon maturity of the FD along with the principal amount or credited to your bank account on a regular basis. A tax is deducted at source on the interest by the bank and paid to the government.

Section 194A of the Income Tax Act, 1961 (IT Act) deals with the provisions relating to TDS on interest on FDs paid to an Indian resident. The applicable rate of TDS depends on factors such as the amount of interest, the payer, and the recipient's age. Interest earned in a financial year up to certain thresholds is not subject to TDS. The different thresholds that apply are mentioned below:

If the interest earned during a financial year is higher than the threshold mentioned above, tax is deducted at source at the rates mentioned below:

As mentioned before, TDS is applicable on FDs when the interest earned is more than ₹ 40,000 in a financial year. Let us take an example to understand this better. For ease of calculation, let us assume you are an Indian resident with a PAN card. 

• The rate of TDS applicable to you will be 10%. If you earn ₹ 20,000 as interest from FD, the TDS would be 10% of 20,000 = ₹ 2,000
• If you are an Indian resident without a PAN card, the TDS would be 20% of ₹ 20,000, which is ₹ 4,000.

The best way to save tax on FDs is by opting for a tax-saving FD. The interest earned on FDs is taxable according to the income tax slab applicable to you. However, the principal amount is eligible for a tax deduction of up to ₹ 1.5 lakh under section 80C of the IT Act. Tax-saving FDs have a lock-in period of 5 years, and withdrawing before the maturity period is not possible, even if you pay penal interest. If that does not work for you, here are some ways you could look to reduce or avoid TDS on regular FDs.

• Form 15G/15H: Your income from FD is not taxable if it doesn’t fall in a tax slab, i.e., if it is lower than the basic exemption limit. The basic exemption limit applicable to residents and senior citizens is ₹ 2,50,000 and ₹ 3,00,000, respectively (₹ 5,00,000 for super senior citizens). You can claim a TDS exemption through a Form 15H declaration if you are a senior citizen. In all other cases, you can use form 15G.
• How to Save Tax on FD: Since interest up to the abovementioned thresholds is not subject to TDS, you can avoid TDS by spreading your FDs across multiple banks. Your interest in FDs held with different banks is not aggregated to apply the threshold limit of no tax deduction. However, you still have to pay tax on interest income if it exceeds the basic exemption limit.
• Timing Your FD Right: Another way to save tax on FD is by timing your FD investments correctly. You may time your FD investment such that the interest earnings are split into two years. For instance, if your fixed deposit tenure is 12 months and your expected earnings are ₹ 40,000, you could start investing after April so that the interest is split into two financial years, and your interest is exempt from TDS.
• Splitting Your FD: If you are an individual with a HUF (Hindu Undivided Family) identity, you could split your FD investment into two – one under your personal identity and one under your HUF identity so that the interest earnings are split.

Below are the TDS rules for FDs in a nutshell.

• TDS on bank FD is applied if your interest income is more than ₹ 40,000 in a financial year (₹ 50,000 for senior citizens).
• If your income is not taxable, you can apply for a TDS exemption. 
• Interest income from tax-saving FDs is also taxable.
• If joint account holders hold the FD, the primary account holder will suffer TDS, and the secondary account holder will not suffer TDS deductions.

Navigating the intricacies of TDS on FD interest can feel like navigating a maze. This guide will give you the knowledge to maximise your returns and minimise your tax burden. Remember:

• Thresholds matter: TDS only kicks in after specific interest thresholds (₹40,000 or ₹50,000 for senior citizens).
• Tax-saving FDs offer shelter: Invest for the long term and claim deductions under Section 80C.
• Exemption forms are your friends: File Form 15G or 15H to skip unnecessary deductions.
• Strategic timing and splitting: Divide your FDs across banks or years for lower tax impact.

This conclusion summarises the key takeaways and encourages readers to apply the information, leaving them feeling empowered and ready to make informed decisions about their FD investments.