Fixed deposits (FDs) continue to remain one of the most widely used savings instruments among Indian investors, providing guaranteed returns with minimal risk. However, many depositors fail to account for how TDS on interest on FD significantly impacts the actual returns they receive. Understanding how TDS works, its implications on your FD earnings, and the legal ways to minimise its impact can help investors plan better and ensure higher net returns.
Understanding how TDS applies to FD interest
When you invest in a fixed deposit, banks and financial institutions pay interest periodically or at maturity. This interest income is fully taxable under the Income Tax Act as ‘Income from Other Sources’.
To ensure tax collection at the source itself, banks and NBFCs are mandated to deduct TDS on interest on FD when the interest income exceeds certain prescribed thresholds in any financial year.
Current TDS threshold limits in 2025
As per prevailing tax regulations for the financial year 2025–26:
- For individuals below 60 years of age: TDS applies if the total FD interest exceeds Rs. 40,000 in a financial year.
- For senior citizens (60 years and above): The threshold limit is Rs. 50,000 per financial year.
If your annual interest earnings stay below these limits across all FDs held in a single financial institution, no TDS will be deducted.
Applicable TDS rates on FD interest
- If valid PAN is submitted: TDS is deducted at 10% on interest exceeding the threshold.
- If PAN is not submitted or is invalid: TDS is deducted at a higher rate of 20% as per Section 206AA of the Income Tax Act.
It is essential to ensure that the financial institution has your correct PAN details to avoid unnecessary higher deductions.
TDS calculation examples
Example 1: Non-senior citizen
- Total FD interest earned: Rs. 75,000
- Threshold: Rs. 40,000
- Taxable interest for TDS: Rs. 75,000 – Rs. 40,000 = Rs. 35,000
- TDS @ 10% on Rs. 35,000 = Rs. 3,500
Thus, Rs. 3,500 will be deducted as TDS, and Rs. 71,500 will be credited.
Example 2: Senior citizen
- Total FD interest earned: Rs. 80,000
- Threshold: Rs. 50,000
- Taxable interest for TDS: Rs. 80,000 – Rs. 50,000 = Rs. 30,000
- TDS @ 10% on Rs. 30,000 = Rs. 3,000
Therefore, Rs. 3,000 would be deducted as TDS.
The misconception about TDS as full tax liability
One common misunderstanding is that TDS deducted by banks represents the full tax liability on FD interest. In reality:
- TDS is only partial tax collection.
- Total interest earned must still be declared in the income tax return (ITR).
- Final tax payable is calculated based on your total taxable income and applicable income tax slab.
- Any excess TDS deducted can be claimed as refund when filing the ITR.
For example, if your total income places you in the 20% tax slab and you have earned Rs. 1,00,000 as FD interest, your actual tax liability on the FD interest is:
Tax = Rs. 1,00,000 × 20% = Rs. 20,000
Less TDS deducted (assuming 10%): Rs. 10,000
Balance tax payable: Rs. 10,000
TDS on cumulative FDs vs non-cumulative FDs
In cumulative FDs where interest is paid at maturity, TDS is usually deducted on an accrual basis each financial year, even though you receive the money later.
In non-cumulative FDs, where interest is paid periodically (monthly, quarterly, or annually), TDS is deducted on each payout whenever it crosses the applicable threshold.
How TDS affects your actual returns
Since TDS reduces the payout received upfront, your effective monthly or yearly cash flow from FDs decreases. The larger your FD interest income, the higher the TDS deduction, directly impacting liquidity even if your total tax liability may be lower.
For example:
- FD amount: Rs. 10,00,000
- Interest rate: 7% p.a.
- Annual interest: Rs. 70,000
- TDS threshold: Rs. 40,000
- TDS applicable on Rs. 30,000 = Rs. 3,000
You would receive Rs. 67,000 as net annual interest, though you may still owe additional tax when filing your return.
How to minimise TDS on FD interest legally
Submit Form 15G or Form 15H
Eligible individuals whose total income is below the taxable limit can submit:
- Form 15G: For individuals below 60 years.
- Form 15H: For senior citizens above 60 years.
By submitting these self-declaration forms at the start of the financial year, banks will not deduct TDS, provided your estimated total income remains below taxable limits.
Split FDs across multiple banks
Since the TDS threshold applies per bank, distributing your FD investments across different financial institutions can help ensure that interest earned in each remains below the threshold, preventing TDS deductions.
For example:
- Rs. 20 lakh FD split equally across 2 banks earning Rs. 70,000 annual interest overall would result in Rs. 35,000 interest per bank—thus, no TDS deduction as it stays below Rs. 40,000 at each bank.
Open joint accounts strategically
Opening joint FDs with family members who have lower income levels may also help in reducing tax liabilities, although interest income still remains taxable in the hands of the primary account holder in most cases.
Laddering your FD tenures
By staggering FD investments across different tenures, maturity dates, and payout frequencies, you can optimise returns while keeping annual interest within TDS thresholds.
Submit updated PAN details
Ensure banks and NBFCs have your correct PAN to avoid higher TDS deductions at 20%.
Why TDS avoidance does not mean tax avoidance
Even if you legally avoid TDS deductions using the above methods, it does not exempt you from paying tax on FD interest. The entire interest earned across all institutions must still be declared when filing your income tax returns, and the applicable tax will be calculated as per your total income slab.
Comparing TDS burden on high-value FDs
Let us consider an example for a high-value FD:
- Total FD investment: Rs. 25,00,000
- Interest rate: 7% p.a.
- Annual interest: Rs. 1,75,000
- TDS threshold: Rs. 40,000
- Taxable portion: Rs. 1,75,000 – Rs. 40,000 = Rs. 1,35,000
- TDS @ 10%: Rs. 13,500
You would receive Rs. 1,61,500 as net annual interest after TDS, even though your final tax payable may be higher or lower depending on your slab.
Summary
Understanding how TDS on interest on FD works is critical to accurately estimating your net FD returns. While banks deduct TDS at 10% once the ₹40,000 (or ₹50,000 for senior citizens) threshold is crossed, your actual tax liability may be higher based on your income slab. Submitting Form 15G or 15H, spreading FDs across banks, using joint accounts, and laddering FD tenures are legitimate ways to minimise upfront TDS deductions. Financial institutions like Bajaj Finserv offer flexible FD options with features that help in efficient tax and investment planning. However, all FD interest remains fully taxable and must be declared while filing your tax return. Careful tax planning ensures that you optimize your FD income while remaining fully compliant with tax laws.
