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Investing wisely is crucial for financial stability. Among the many investment options available, Fixed Deposit (FD) remains one of the safest and most attractive choices, offering high interest rates compared to savings accounts. However, many investors are unaware of how Tax Deducted at Source (TDS) applies to FD earnings.
Let’s understand what a Fixed Deposit (FD) is, how TDS is calculated on FD interest, and how you can manage tax liabilities effectively.
What is a Fixed Deposit (FD)?
A Fixed Deposit (FD) is a financial investment where an individual deposits a fixed amount with a bank or financial institution for a specific period. In return, the bank offers a fixed interest rate throughout the tenure.
FD is a low-risk investment with guaranteed returns.
Interest can be paid monthly, quarterly, half-yearly, or annually as per the investor’s preference.
FD offers higher interest rates compared to regular savings accounts.
What is Tax Deducted at Source (TDS)?
Tax Deducted at Source (TDS) is a direct tax collection system in which tax is deducted at the source of income. The entity making the payment (deductor) deducts tax before paying the recipient (deductee) and deposits it with the government.
TDS is applicable on various income sources, such as:
Salary
Interest earned on Fixed Deposits
Rent
Professional fees
What is TDS on Fixed Deposits (FDs)?
When an investor earns interest on an FD, the bank deducts TDS if the interest exceeds a specified limit. The deducted TDS amount is directly deposited with the Income Tax Department and is reflected in the investor’s income tax account.
Key Points About TDS on FD:
If the interest earned is below the threshold, no TDS is deducted.
If TDS is deducted, it is adjusted against the investor’s total tax liability when filing an income tax return.
How is TDS on Fixed Deposit Calculated?
The interest earned on FDs is fully taxable and falls under the category of "Income from Other Sources".
TDS is calculated based on:
Total interest earned on FD
Deposit amount and tenure
Applicable tax slab of the individual
TDS Exemption Limits on FD Interest
| Category | TDS Exemption Limit (Annual Interest Income) | TDS Deduction Rate |
|---|---|---|
| General Investors | ₹40,000 or less | No TDS Deducted |
| Senior Citizens (60+ years) | ₹50,000 or less | No TDS Deducted |
| Interest above ₹40,000 (General) | 10% TDS | |
| Interest above ₹50,000 (Senior Citizens) | 10% TDS | |
| No PAN Card Provided | 20% TDS |
Important Notes:
If your total annual income is below ₹2.5 lakh, you can submit Form 15G (for individuals) or Form 15H (for senior citizens) to avoid TDS deduction.
If PAN is not provided, banks will deduct TDS at 20% instead of 10%.
How to Avoid TDS on FD?
If you want to prevent unnecessary TDS deductions, follow these steps:
Submit Form 15G or Form 15H (if eligible) to declare that your total income is below the taxable limit.
Opt for multiple FDs in different banks so that interest earned in each account stays below ₹40,000 per year.
Consider investing in tax-saving FDs, which offer deductions under Section 80C of the Income Tax Act (up to ₹1.5 lakh).
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