Fixed Deposits (FDs) have long been a popular investment option in India, offering stable returns with minimal risk. However, the taxation on FD interest income has often been a point of concern for investors. Recently, the Indian government has revised the tax exemption limits on FD income, bringing relief to many depositors. This article provides an in-depth look at the new tax rules, exemptions, and how they impact your savings.
Income Tax on Fixed Deposits
| Topic | Details |
|---|---|
| New TDS Threshold for Non-Senior Citizens | Increased from ₹40,000 to ₹50,000 per financial year. |
| New TDS Threshold for Senior Citizens | Increased from ₹50,000 to ₹1,00,000 per financial year. |
| Tax-Saving FD Deductions | Up to ₹1.5 lakh under Section 80C. |
| TDS Rate | 10% if PAN is provided; 20% if PAN is missing. |
| Form 15G/15H Usage | To avoid TDS deduction if total income is below the taxable limit. |
With the new TDS exemption limits, depositors can now earn higher FD interest without immediate tax deductions. However, FD interest remains taxable, so proper tax planning is crucial. If your income is below the taxable threshold, submitting Form 15G/15H can help avoid TDS. For better tax efficiency, consider alternative investment options like PPF, SCSS, or debt mutual funds.
Understanding the New Income Tax Rules on Fixed Deposits
1. What Is Tax Deducted at Source (TDS) on FD Interest?
When you earn interest on your FD, banks are required to deduct Tax Deducted at Source (TDS) before crediting the interest amount to your account. This is to ensure that tax is collected at the source itself, preventing tax evasion.
Previously, TDS was applicable if the interest income exceeded:
- ₹40,000 per year for individuals below 60 years.
- ₹50,000 per year for senior citizens (aged 60 and above).
With the latest revisions, these limits have now been increased, reducing the tax burden on depositors.
2. New Tax Exemption Limits on FD Interest (Effective 2025)
For Non-Senior Citizens:
- TDS will be deducted only if the interest income exceeds ₹50,000 per year.
- If your interest earnings are below ₹50,000, no TDS will be deducted.
For Senior Citizens:
- The exemption limit has doubled from ₹50,000 to ₹1,00,000 per year.
- This means senior citizens can earn up to ₹1 lakh in interest without TDS deduction.
TDS Rate:
- 10% TDS is deducted if your PAN is registered with the bank.
- 20% TDS is deducted if you haven’t provided your PAN details.
see also: Best FD Rates in India (March 2025)
3. How to Avoid TDS Deduction on FD Interest?
If your total income is below the taxable limit, you can avoid TDS by submitting the following forms to your bank:
- Form 15G (for individuals below 60 years)
- Form 15H (for senior citizens above 60 years)
These forms declare that your total income is below the taxable threshold, and hence, TDS should not be deducted.
4. Tax-Saving Fixed Deposits & Exemptions Under Section 80C
Investors looking to save taxes can invest in tax-saving fixed deposits with a 5-year lock-in period. These deposits qualify for deductions under Section 80C of the Income Tax Act, 1961, up to a maximum of ₹1.5 lakh per financial year.
However, note that while the principal amount qualifies for deduction, the interest earned is fully taxable.
5. Should You Still Invest in Fixed Deposits?
Fixed Deposits remain a secure investment option for those looking for stable returns without market risks. Here are some benefits:
- Guaranteed Returns: Unlike stocks and mutual funds, FD returns are fixed and predictable.
- Flexible Tenure: You can choose tenures ranging from 7 days to 10 years.
- Higher Interest Rates for Seniors: Senior citizens often receive 0.50% extra interest on FD investments.
- Tax Benefits: Tax-saving FDs provide deductions under Section 80C.
However, keep in mind:
- FD interest is fully taxable.
- Inflation can reduce the real returns from FDs.
- Better alternatives, such as debt mutual funds, may offer tax-efficient returns.
6. Alternative Investment Options for Higher Returns
If you want better post-tax returns, consider the following alternatives:
a) Debt Mutual Funds
- Why? They offer indexation benefits on long-term gains, reducing tax liability.
- Best for: Investors in higher tax brackets.
b) Public Provident Fund (PPF)
- Why? Interest is completely tax-free.
- Lock-in: 15 years but can be extended in 5-year blocks.
- Best for: Long-term savers.
c) Senior Citizen Savings Scheme (SCSS)
- Why? Higher returns than FDs (~8% per annum).
- Lock-in: 5 years.
- Best for: Retired individuals looking for a stable income.
see also: How the Income Tax Department Monitors Your Income and Recovers Dues
Income Tax on Fixed Deposits FAQs
1. Is FD interest taxable after the new exemption limits?
Yes, FD interest is still taxable. The new limits only impact TDS deduction. You must report interest income in your tax returns and pay tax as per your income slab.
2. What happens if my bank deducts TDS even though my income is below the limit?
If TDS is deducted but your total income is below the taxable limit, you can claim a refund while filing your ITR.
3. Can I split my FDs across banks to avoid TDS?
No, because banks report interest income to the tax department, and you must declare all interest income while filing your tax return.
4. How do I submit Form 15G/15H?
You can submit it online via net banking or physically at your bank branch.
5. Is it better to invest in mutual funds instead of FDs?
Mutual funds offer better post-tax returns but come with risks. If you seek stability, FDs remain a good choice.
