Tax on Fixed Deposit Interest: How to Minimise Your Tax Burden

Fixed deposits are a favourite investment for millions of Indians, but many depositors are unpleasantly surprised when they see TDS deducted from their FD interest. Understanding how FD interest is taxed — and knowing the legal ways to minimise your tax burden — can save you thousands of rupees every year. This is especially important for self-employed individuals who manage their own tax planning.

How Is FD Interest Taxed?

Interest earned on fixed deposits is fully taxable. It is added to your total income and taxed at your applicable income tax slab rate.

Example: If you earn Rs 50,000 as FD interest in a year and you fall in the 30% tax bracket, you owe Rs 15,000 in tax on that interest (plus cess). This effectively reduces your real return from 7% to about 4.9%.

Key points to remember:

• FD interest is taxed on an accrual basis, not when you actually receive it. So even if you have a cumulative FD where interest is paid at maturity, you must declare the interest accrued each year in your tax return.
• Interest from all banks and branches is combined for tax purposes.
• Both bank FDs and corporate FDs are taxable.

What Is TDS on FD Interest?

TDS (Tax Deducted at Source) is a mechanism where the bank deducts tax upfront from your interest income before paying it to you.

• Threshold: TDS is deducted if your total FD interest from a single bank exceeds Rs 40,000 per year (Rs 50,000 for senior citizens).
• TDS rate: 10% if you have provided your PAN. Without PAN, the rate jumps to 20%.
• Important: TDS is not your final tax. If your slab rate is higher than 10%, you need to pay the difference. If your total income is below the taxable limit, you can claim a TDS refund.

Smart Ways to Minimise Tax on FD Interest

1. Submit Form 15G or 15H

If your total income is below the basic exemption limit (Rs 3 lakh under new regime, Rs 2.5 lakh under old regime), you can submit Form 15G to the bank to avoid TDS deduction. Senior citizens (60+) can submit Form 15H.

This does not exempt you from tax — it only prevents TDS. If your total income exceeds the exemption limit, you must still pay tax.

2. Spread FDs Across Banks

Since TDS is calculated per bank, splitting your FDs across multiple banks can keep the interest from each bank below the Rs 40,000 threshold. However, remember that you still need to declare total interest income in your ITR.

3. Invest in Your Spouse’s or Parent’s Name

If your spouse or parent has little or no income, they can invest in FDs under their name. The interest will be taxed at their (lower or zero) tax slab. However, be aware of clubbing provisions — income from investments transferred to your spouse without adequate consideration may be clubbed with your income.

4. Choose a Tax-Saving FD

A 5-year tax-saving FD lets you claim a deduction of up to Rs 1.5 lakh under Section 80C of the old tax regime. This reduces your taxable income. Note: the interest on this FD is still taxable.

5. Consider the New Tax Regime Carefully

Under the new tax regime (default from FY 2024-25), you cannot claim the Section 80C deduction for tax-saving FDs. However, the basic exemption limit is higher at Rs 3 lakh, and the slab rates are more favourable. Calculate which regime works better for your specific situation.

6. Time Your FDs Wisely

If you open an FD in March, the interest accrued for just a few days falls in the current financial year, while the bulk of the interest falls in the next year. This can help manage your tax liability across years.

Self-Employed Tax Tips for FD Holders

As a self-employed individual, your tax situation is unique:

• You likely file ITR-3 or ITR-4, where FD interest must be reported under “Income from Other Sources.”
• If your business income fluctuates, use low-income years to book FD interest (by choosing FD tenures that mature in those years).
• Maintain proper records of all FDs across banks, as the tax department can track them through your PAN.

Plan Your FD Tax Strategy with Bachatt

Bachatt helps you track all your fixed deposits and the interest earned across banks in one place. Know your total FD interest at a glance so you are never caught off guard during tax season. Start optimising your savings with Bachatt today.