In India, a fixed deposit is a widely preferred investment option that allows individuals to earn a consistent income while safeguarding the principal from market risks. The interest earned on fixed deposits is subject to taxation under the Income Tax Act of India 1961. The taxation is based on the individual’s applicable tax bracket.
For example, the interest earned on a fixed deposit is subject to TDS if it exceeds a certain threshold. This tax is generally deducted based on the rules and rates set by the Income Tax Department of India.
To gain a deeper understanding of TDS on FD interest and manage it properly, individuals need to understand the basics of this tax deduction.
What is TDS on Fixed Deposit?
TDS on FD is a tax deducted at the source from the interest income earned on a fixed deposit account. However, TDS is only applicable when the interest income falls under the taxable category. Regardless of where the FD account is held, the interest is taxable.
It is important to note that earnings from a tax-saving FD are also subject to TDS. For joint FD accounts, TDS is deducted based on the PAN of the primary account holder, meaning the secondary account holder is not liable for the TDS deductions.
Who Deducts TDS on Fixed Deposit?
The financial institutions or banks that provide the fixed deposit scheme are responsible for deducting TDS on the interest earned from the FD. Typically, TDS is deducted automatically at the end of each financial year.
Summary of TDS Rate on FD
The TDS rate on fixed deposits varies depending on factors such as the FD holder’s age, tax bracket, and PAN status.
Generally, the TDS on FD can be categorized as follows:
- Indian Residents – TDS rate when PAN is provided
Starting from the financial year 2020-2021, resident Indians will be taxed at a TDS rate of 7.5% on the interest earned from their fixed deposits, provided the earnings exceed Rs. 5,000.
- Indian Residents and NRIs – TDS when PAN is not provided
In this case, resident Indians are required to pay TDS on FD earnings at a rate of 20%, while NRIs are subject to 30% TDS, along with applicable surcharge and cess.
The following table provides an overview of the current TDS rates on FD:
| Type of Fixed Deposit | Fixed Deposit Rate |
| Fixed Deposit | 10% (changed to 7.5% since May 2020) |
| Fixed Deposit without PAN card | 20% |
| NRO FD | 30% |
| NRE FD | Tax-free |
| FCNR FD | Tax-free |
What is the Exemption Limit for TDS Deduction on FD?
The following points highlight the exemption limits for various entities:
- For company fixed deposits
The TDS deduction limit for company fixed deposits in a financial year is Rs. 5000.
- Income bracket
Individuals with a total taxable income below Rs. 2.5 lakh are not required to pay TDS on FD interest.
- For senior citizens
Senior citizens are eligible for a TDS exemption limit of Rs. 5000 in a financial year.
How is TDS Calculated on FD?
Here’s an example to illustrate how TDS is calculated on FD interest.
Assume Lisa has two fixed deposit accounts worth Rs. 3 lakh each, one with an NBFC and the other with a bank. Both accounts earn interest at the rate of 10% for 4 years.
On calculation, the total interest earned from both FDs would amount to Rs. 60,000 annually. Hence, the total interest earned on both FDs is as follows:
= Rs. 60,000 x 4
= Rs. 240,000
According to tax regulations, TDS on FD interest will be calculated at the rate of 7.5%
Thus, 7.5% of Rs. 60,000 equals:
Rs. 4500
To simplify the calculation process, fixed deposit holders can also use an online TDS calculator to quickly determine the tax amount. This helps avoid manual errors and speeds up the calculation.
How to Avail TDS Waiver on FD?
Fixed deposit holders can apply for a TDS exemption on their FD interest under relevant provisions of the Income Tax Act. For example, they can submit Form 15G or Form 15H to claim a TDS waiver on their FD earnings. These forms should be provided to the FD issuer at the start of the financial year.
It is important to note that these forms act as a self-declaration, confirming that the total income in the financial year is nil, so no TDS should be deducted on FD interest.
Additionally, individuals whose income falls below the taxable limit can also apply for a TDS refund on taxes already paid. This refund can be claimed during the filing of Income Tax Returns.
Since fixed deposits are often used to provide a stable income and enhance savings, it’s important to explore strategies to prevent the erosion of these savings. As a result, individuals should consider ways to optimize TDS on FD interest to maximize savings and minimize their tax burden. Furthermore, those who cannot avoid TDS on their FD should ensure timely filing to avoid penalties or other tax-related consequences.