Does Tax Apply on FD?

Investment in fixed deposits (FD) remains one of the most sought-after investment vehicles in India, yet any interest earned on them must be included when filing your income tax returns each year.

Banks deduct TDS at the time of crediting annual interest if it exceeds Rs 40,000 (Rs 50,000 for senior citizens), however you can submit Form 15G/15H in order to avoid this deduction.


Interest earned on fixed deposits (FDs) is subject to tax under Section 194A of the Income Tax Act and banks must deduct TDS (Tax Deduction at Source) of 10% when annual interest exceeds Rs 40,000 or Rs 50k respectively, plus 20% more if an individual doesn’t provide their PAN number.

TDS on fixed deposits (FDs) is calculated based on an investor’s income tax slab rate, which can significantly lower returns, particularly those in higher tax slab rates. To prevent this from happening, submit Form 15G or 15H at the start of each year asking banks not to deduct TDS on your FD interest; alternatively you could open your FDs at post offices instead of banks to reduce TDS deduction. But it’s still essential to verify every year whether your TDS deduction has been properly handled.

Tax on FD interest

If your fixed deposit exceeds Rs. 40,000, its interest earnings are subject to taxation. Banks or post offices deduct tax at source (TDS), equivalent to 10% of annual interest paid, from your earnings before reporting it on your income tax return. You may be able to avoid this tax payment altogether by filing Form 15G or 15H instead.

Save on TDS by spreading out your investment among multiple banks and keeping each annual interest earnings below Rs. 10,000 threshold; this way, your tax rates won’t rise significantly.

One way to reduce Tax Deposit and Withholding Services (TDS and WTS) payments is investing in a tax-saving fixed deposit (FD). These FDs offer tax deductions of up to Rs 1.5 lakh annually as well as rebates of up to Rs 50,00 per year; making these an excellent way for people in lower tax slabs to reduce TDS liabilities; however, you must first consider your post-tax earnings when selecting this type of FD.

Tax on FD maturity

If you wish to avoid income tax when investing in fixed deposits (FDs), post office schemes such as Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), and National Savings Certificates (NSC) could help. They don’t subject TDS deduction and come insured up to Rs 5 lakh.

As banks deduct TDS on interest when it is credited, rather than when an FD matures, reporting your income periodically is key for minimizing income tax liabilities and potential liability increases.

Banks typically withhold TDS at 10% for resident individuals; senior citizens are exempt, as they can claim up to Rs 50,000 as a deduction under Section 80TTB of the Income-tax Act. Any interest income remaining after deducting TDS will be added back into your other taxable income when filing your return; you can request a TDS refund if it was less than your actual tax liability.

Tax on FD withdrawal

If you withdraw your Fixed Deposit prematurely, a penalty will be assessed as income for tax purposes. This penalty stems from your early encashment resulting in the bank no longer fulfilling their promise to provide interest at a specific rate – for instance if you committed to pay 8% per annum but withdraw prior to two years, only 7% interest per year would be awarded as penalty interest from them.

Submit Form 15G or 15H (if you are senior citizen). These declarations state that your FD interest income does not count toward your taxable income and thus the bank won’t deduct TDS from it.

Timing your FD investments so the interest earned in any given financial year does not surpass Rs 40,000 can help save on TDS. Or you could consider investing in 5-year tax-saving FDs or NSCs that do not incur TDS charges.

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