Tax Saving Options for Interest Earned on Fixed Deposit

January 10, 2023

Introduction

Fixed deposits give us guaranteed return benefits, a preferred investment option for taxpayers. The extra money you earn as interest from FDs is taxable like all other components. While you are liable to pay tax on your fixed deposit interest earnings, there are ways to bypass this liability to a certain extent. Opening a tax-saving FD account is the simplest way to save tax on FD interests.

A tax-saving FD gives you access to tax rebates of up to ₹1.5 lakhs (annually) under section 80C of the Income Tax Act 1961. However, in order to enjoy these tax exemptions, you will have to lock in your lump-sum deposit for at least 5 years. If the 5-year lock-in period is not an issue for you, then the easiest answer to the question How to save tax on FD interest? is a tax-saving FD.

Feature of a Tax Saving Fixed Deposit

Before going this route to save tax on FD interest earnings, you should know more about the features of such FD schemes. We've outlined these key features below:

  • Tax-saving deposits come with a minimum lock-in tenure of 5 years
  • Premature withdrawals or loans against such FD schemes are not allowed
  • Tax-saving FD can be booked at all private and public sector banks (except rural and cooperative banks)
  • Both individuals above the age of 18, and HUFs can apply for such schemes. Minors are also eligible for such tax-saving FDs, provided the investment is made jointly with an adult
  • The minimum deposit amount for a tax-saving FD varies from bank to bank, while the maximum deposit amount is capped at ₹1,50,000
  • The interest rate for tax-saving FDs varies from 5.5% to 7.25%. Senior citizens qualify for a slightly higher ROI
  • The interest generated from such schemes is taxable. The tax on FD interest is deducted at the source (TDS)
  • A nomination facility is also available with a tax-saving FD plan

When is FD interest taxable?

Since FD returns are classified under the 'Income from Other Sources' category of the Income Tax Act 1961, these earnings are subject to tax deductions. Taxes on FD interest earnings are applicable if the interest accrued on the deposited amount exceeds ₹40,000 in a fiscal year. In other words, you can avoid taxation on FD returns if your earnings fall below this threshold.

For senior citizens, this limit for interest earned is ₹50,000. If your earnings exceed this limit, your bank will deduct 10$ from your total interest earnings as TDS. However, you much submit your PAN details to enjoy a 10% deduction rate. Deductions will be higher at 20% if your bank does not have your PAN details. The TDS rate for non-resident Indians (NRI) is set at 30%. Post TDS deductions, your returns will be taxed as per your income tax slab.

How to save tax on FD interest?

You can safeguard your returns from Income Tax deductions quite easily. Here's how you can save tax on FD interest earnings:

  • Form 15G/15H - To enjoy tax exemptions on your FD earnings, you need to submit a self-declaration form or TDS waiver stating that you have zero taxable income. Doing so will prevent the bank from deducting income tax on your fixed deposit interest. Regular tax saver FD holders must submit 15G while senior citizens have to submit for 15H to avail of such TDS exemptions.
  • Distributing Fixed Deposits - You can also bypass TDS deductions by investing your money wisely. For instance, if you divide the total deposit amount between two different banks, you can easily prevent the earnings from exceeding the ₹40,000 limit
  • Splitting Fixed Deposit - Another easy solution to the 'how to save tax on FD interest' is splitting FD deposits between two accounts. In other words, you can start a tax-saving FD under your own account and another one under a HUF account. Since both FDs will be classed under separate accounts, interest accrued on them won't be calculated as cumulative earnings.



Note: Above details are meant for generalized situations and shall not be used as a legal basis for any particular situation readers may have. We do provide tax consultations for specific scenarios and can be reached through our contact us form.



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