Home Investments Fixed Deposit How to save tax on Fixed Deposit interest?

How to save tax on Fixed Deposit interest?

there are some ways for avoiding taxation on fixed deposit interests.

Since fixed deposits earn a higher rate of interest, they are used by thousands of people but the income on fixed deposit interest is added to your total income and is taxable. The benefit you get from the generating interest on fixed deposits can get nullified if you end up paying tax on the interest. However, there are some ways for avoiding taxation on fixed deposit interests.

Tax on Fixed Deposit interest

The amount you invest in an FD is exempt from tax but the interest is taxable. If the interest earned from fixed deposit scheme exceeds Rs. 10,000 in a financial year, then a 10% plus 3% education cess will be deducted as TDS (Tax Deduction at Source). So you would end up paying 10.3% as tax on the amount of interest earned. This can erode the benefit from earning interest as some amount will go away in taxes and you will only get the balance. What’s more, if your pan details are not fully updated with your bank, then the bank is free to deduct TDS for fixed deposit schemes at 20%!

How to save tax on fixed deposit interest?

Submit form 15G/15H

You can submit the relevant forms (15G or 15H for senior citizens) stating you have no taxable income. The bank will not deduct tax in this case. This form needs to be submitted each year to the bank. You will need to list your FD’s and submit it to the bank.

Distribute your FD’s

Don’t invest the entire amount in one bank. Make different Fixed Deposits with different banks so that the entire interest won’t cross the taxable limit. For example, let’s say you have decided to invest Rs. Two lakhs in a fixed deposit scheme that pays 10% interest. So you are liable to get Rs. 20,000 as interest. But since this exceeds Rs. 10,000, TDS will be deducted but if you split this amount into two separate FD’s (of one lakh each then you end up paying no TDS).

Select the tenure carefully

Income from fixed deposit interest is taxable but there is a loophole here which you can use to your advantage as an investor. The income from fixed deposit interest is taxable only if the amount exceeds the taxable limit in a financial year so select the tenure in such a way that the income will never exceed in a financial year and you can avoid paying tax. For example, if you start your FD from 1st April, then by next April if the interest exceeds Rs. 10,000 you are liable for TDS but if you open the same FD later, then the interest earned will not be liable for TDS as it will be distributed evenly across two financial years.

Thus we see that with some smart thinking, you can avoid paying taxes on fixed deposit schemes so play smart and invest smartly. If somehow your bank has already deducted TDS even when the interest income from your fixed deposits is non-taxable, you are free to file for a refund.

2 COMMENTS

Parul November 13, 2015 at 3:59 am

There is a huge variety of Fixed Deposit schemes offered in the market now a days and investors can pick the one depending upon the requirement. The interest earned on Fixed deposits is tax deductible and investors are always eager to save this tax. The above article explains the multiple ways of avoiding TDS on the interest on Fixed Deposit.

Vandana Agarwal July 27, 2016 at 11:57 am

Being taxed on fixed deposit interest is hurting specially when it can be avoided. Tax should not be evaded at any cost but if it can be avoided, then it is no wrong. The various ways in the above article seems the best possible way to avoid the unneccesary expenditure on taxes.