How to Minimise Tax on Fixed Deposit Earnings

Fixed Deposits are probably the most preferred choice of investments in Indian household. However, they are not tax efficient. A TDS of 10% is applicable on FD interest, provided the interest income exceeds ₹50,000 (₹1 lakh for senior citizens) in a financial year. That said, you can still save on your tax outgo by implementing effective tax-saving strategies. 

In this article, we'll explore the different ways you can minimise taxes on fixed deposit earnings. By implementing these strategies and being aware of tax rules, you can make informed financial decisions that will benefit you in the long run.

What is the FD Tax Rule In India? 

Interest earned on fixed deposits (FDs) is fully taxable in India and classified under "Income from Other Sources." The taxation of FD interest is subject to the individual's income tax slab, and Tax Deducted at Source (TDS) is applicable when the interest exceeds certain thresholds.

Taxation Details

1. Tax Slabs

   The interest income from FDs is added to your total income and taxed according to your applicable tax slab. For example

   If you earn ₹25,000 in interest and fall into the 20% tax bracket, you will pay ₹5,000 in tax (₹25,000 * 20%) on that interest.

    

2. TDS Thresholds

   For individuals below 60 years, TDS is deducted if the total interest income exceeds ₹50,000 in a financial year (applicable for FY 2025-26). For 2024-25, TDS exemption for regular citizens is capped at ₹40,000.

   For senior citizens (60 years and above), the threshold is ₹1,00,000  (applicable for FY 2025-26). For 2024-25, TDS exemption for senior citizens is capped at ₹50,000. If your interest is below these limits, no TDS will be deducted.

    

3. TDS Rate

   The TDS rate on FDs is 10% of the interest that is earned. However, if you do not provide your Permanent Account Number, the TDS would be 20%.

    

Examples

Example 1: Ritwik has a 3-year FD that earns him ₹25,000 annually. Since his total taxable income, including this interest, falls in the 20% tax bracket, he will owe ₹5,000 in taxes on the FD interest when he files his return.

Example 2: Mr. Dsouza earns ₹70,000 in interest from his FDs. The bank deducts ₹7,000 as TDS (10% of ₹70,000). However, since his total income places him in the 30% tax bracket, he must pay an additional ₹14,000 (total tax of ₹21,000 minus ₹7,000 TDS) when filing his return. 

How to Minimise Taxes On Fixed Deposit Earnings?

To minimise taxes on fixed deposit (FD) earnings, individuals can employ several strategies that leverage tax regulations effectively. Here are the key methods:

1. Utilise Form 15G and Form 15H

• Form 15G: This form can be submitted by individuals below 60 years of age to declare that their total income is below the taxable limit of ₹2.5 lakh (for old tax regime) and ₹4 lakh for new tax regime. By submitting this form, they can avoid TDS on FD interest if their income remains below this threshold.
   
• Form 15H: Senior citizens (60 years and above) can use this form to declare their income is below ₹3 lakh, thus exempting them from TDS on interest income up to ₹1 lakh annually.

2. Time Your FD Investments

One of the tax-saving strategies you can adopt is timing the initiation of fixed deposits, which can help in spreading the interest income across two financial years. For instance, starting a 1-year FD in September can result in interest being credited in two different financial years, potentially keeping each year's interest income below the TDS threshold of ₹50,000 (or ₹1 lakh for senior citizens - FY 2025-26) and minimising tax liability.

3. Split FDs Between Accounts

By dividing FDs across different accounts—like that of personal accounts and accounts under a HUF—individuals can make their interest income more tax effective. This strategy helps in keeping the interest earned from each account below the taxable limits, thus reducing overall tax implications.

4. Invest in Tax-Saving Fixed Deposits

Another way to minimise taxes on fixed deposit earnings is to use benefits under Section 80C, which allows individuals to claim deductions of up to ₹1.5 lakh from their taxable income. However, Tax Saving Fixed Deposits come with a lock-in period of 5 years. This investment not only helps in tax saving but also ensures capital protection and guaranteed returns.

Consider Senior Citizen Benefits

Senior citizens are allowed a higher TDS exemption limit (up to ₹1 lakh) on fixed deposit interest. By taking advantage of this provision, they can retain more of their interest income without incurring tax liabilities, thus enhancing their financial planning during retirement. 

By implementing these strategies, individuals can effectively manage their tax liabilities associated with fixed deposit earnings, ensuring they retain a larger portion of their interest income.