Fixed Deposits (FDs) are one of the most popular investment options for Indians looking for stable returns and security. However, many investors are unaware that interest earned on Fixed Deposits is taxable. If not planned wisely, you may end up paying more in taxes than necessary. In this guide, we’ll break down everything you need to know about tax on FD interest and how to save it legally.
Is There Tax on Interest on Fixed Deposits?
| Topic | Summary |
|---|---|
| Is FD Interest Taxable? | Yes, FD interest is fully taxable under ‘Income from Other Sources’. |
| TDS on FD Interest | Banks deduct 10% TDS if interest exceeds ₹40,000 (₹50,000 for senior citizens). Without PAN, TDS is 20%. |
| How to Save Tax? | Submit Form 15G/15H, invest in tax-saving FDs, distribute FDs across banks, or use alternative investments like PPF and tax-free bonds. |
Yes, FD interest is taxable, but with smart financial planning, you can reduce or avoid this tax legally. By using strategies like Form 15G/15H, tax-saving FDs, distributing FDs across banks, and considering alternative investments, you can optimize your earnings and minimize your tax burden. Always ensure you declare FD interest in your ITR to avoid penalties.
Understanding Taxation on Fixed Deposit Interest
How is FD Interest Taxed?
When you earn interest on your Fixed Deposit, it is added to your total income and taxed based on your income tax slab. This means that higher-income individuals may pay more tax on their FD earnings.
For example:
- If you fall under the 30% tax slab, your FD interest will be taxed at 30%.
- If you are in the 5% tax bracket, your FD interest will be taxed at 5%.
Tax Deducted at Source (TDS) on FD Interest
Banks deduct TDS on FD interest if it crosses a certain limit in a financial year:
- For individuals below 60 years: TDS is deducted at 10% if total FD interest exceeds ₹40,000.
- For senior citizens (60+ years): The TDS threshold is ₹50,000.
- Without PAN: If you haven’t provided your PAN, TDS is deducted at 20%.
Important: Even if no TDS is deducted, you must declare FD interest in your Income Tax Return (ITR) and pay tax accordingly.
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How to Save Tax on FD Interest?
Now, let’s look at legal ways to reduce or avoid tax on FD interest.
1. Submit Form 15G / Form 15H
If your total income is below the taxable limit (₹2.5 lakh for individuals, ₹3 lakh for seniors, ₹5 lakh for super seniors), you can submit:
- Form 15G (for individuals below 60 years)
- Form 15H (for senior citizens)
This prevents banks from deducting TDS on FD interest.
2. Invest in Tax-Saving Fixed Deposits
Certain FDs offer tax benefits under Section 80C of the Income Tax Act.
- Lock-in period: 5 years
- Max deduction: ₹1.5 lakh per year
- Tax on interest: Still taxable, but you save on the principal investment.
3. Spread Your FD Investments Across Banks
Instead of putting all your money in one FD, distribute it across multiple banks so that the interest from each stays below the TDS threshold.
For example:
- ₹5 lakh in Bank A (interest ₹35,000)
- ₹5 lakh in Bank B (interest ₹35,000)
- No TDS deducted as both are below the threshold.
4. Time Your FD Investments Smartly
Plan your FDs in such a way that interest is spread across financial years, keeping it below the taxable limit.
Example:
- 1-year FD started in March 2025 → Interest earned in 2026-27
- Another FD started in April 2025 → Interest earned in 2027-28
This way, you don’t accumulate too much interest in one financial year.
5. Consider Alternative Tax-Free Investments
Instead of FDs, you can invest in options with tax benefits:
| Investment | Tax Benefits |
|---|---|
| Public Provident Fund (PPF) | Interest is completely tax-free. |
| Tax-Free Bonds | Issued by government entities, offering tax-free interest. |
| National Pension System (NPS) | Tax deduction under Section 80CCD(1B) up to ₹50,000. |
| Equity-Linked Savings Scheme (ELSS) | Deduction under Section 80C, with potential for higher returns. |
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Tax on Interest on Fixed Deposits FAQs
1. How do I check if TDS has been deducted on my FD interest?
You can check your Form 26AS on the Income Tax website or review your bank statements to see if TDS has been deducted.
2. What happens if I don’t declare my FD interest while filing ITR?
The Income Tax Department can issue a notice for tax evasion, and you may have to pay penalties and interest on the unpaid tax.
3. Can NRIs avoid TDS on FD interest?
No, NRIs are subject to 30% TDS on FD interest. They can, however, claim benefits under Double Taxation Avoidance Agreements (DTAA) with certain countries.
4. Is there a way to get a refund on deducted TDS?
Yes! If your total income falls below the taxable limit, you can claim a TDS refund when filing your Income Tax Return (ITR).
5. Are Recurring Deposits (RDs) taxed the same way as FDs?
Yes, RD interest is also taxable and subject to TDS if it crosses the threshold.
