How Do You Save Tax And TDS On Fixed Deposit?

People in India generally choose a Fixed Deposit or FD when it comes to select a good investment option. This is because opening an FD offers you the chance to accumulate interest on your money over the years with good returns. However, it is important to note that FDs may come with taxes and TDS (Tax Deducted at Source) on the interests earned. Learn how to reduce taxes and TDS on FD interests by reading this blog.

Defining TDS on FD

Tax Deducted at Source (commonly known as TDS) is a requirement for banks to deduct from the interest earned through your Fixed Deposit (FD) when it reaches a threshold. It helps individuals to accurately report their income and fulfill their tax obligations accordingly. 

For Indian residents, when opening an FD account, the TDS on FD interest earned is set at 10%, provided your PAN details are shared with the bank, otherwise it can go up to 20%. If the interest you earn from FD goes over Rs. 40,000 in a year (or Rs. 50,000 for seniors), the bank will take out TDS from it otherwise no TDS will be cut. 

The bank calculates TDS based on the interest earned than the FD amount itself. For example, when you earn Rs. 50,000 in interest from an FD, a 10% TDS (Rs. 5000 ) is subtracted by the bank. Nevertheless, should your tax obligation be lower than the deducted TDS amount, you have the option to file a tax return to request a refund of the surplus amount. 

Ways to Save Taxes and TDS on FD

•  Use Forms 15G and 15H

Forms such as Form 15G for those under 60 years and Form 15H for those over 60 years can assist you avoid TDS deductions on your FD interest payments if your income is below the limit and you are a citizen who is under 60 years or over 60 years.

If you are under 60 years old and your income is below the limit you can fill out Form 15H to declare this and avoid having tax deducted at the source. For citizens with an income below the limit can use Form 15H to avoid deductions on TDS for Fixed Deposits. 

Note– Make sure to fill out these forms at the beginning of every year so that the bank doesn’t deduct TDS from your interest earnings. 

• Distribute Your FDs Across Different Banks

Try spreading your Fixed Deposits (FDs) across banks to prevent TDS deductions. Ensure that the interest earned from each bank stays under Rs. 40,000 (or Rs. 50,000 for seniors). It may need some organising and oversight and can help you manage your TDS effectively. 

• Go For Cumulative Fixed Deposits

With a cumulative FD, interest is paid out at the conclusion of the FD period instead of on a regular basis. With this strategy, the interest is compounded over time and only paid out when the FD matures. This method can be advantageous as it may prevent TDS deductions on interest payments, if the total interest earned by maturity falls below the taxable limit. 

• Choose Tax-Saving FDs

Tax-saving investments have a five-year lock-in period and are eligible for up to Rs. 1.5 lakh in tax deductions under Section 80C of the Income Tax Act. Although, the interest earned is subject to taxation, the initial investment amount can offer tax saving advantages enabling you to lower your income. 

• Invest Under The Name of Your Family Member

You can also save TDS and taxes on your FD by opening the FD under a family member’s name whose salary comes under a lower bracket or has no income at all. The interest generated will be considered on their income which may lead to the avoidance of TDS and ultimately reduce the tax burden on your family. 

• Claim a TDS Refund by Filing an Income Tax Return (ITR)

If TDS has been taken from your FD interest but your overall taxable income is under the exemption threshold, you can request a reimbursement when filing your ITR. Make sure to provide all income and TDS information in the tax filing to receive a refund of any extra TDS withheld by the bank. 

• Use FD Interest Income for Tax Deduction under Section 80TTB

Senior citizens have the opportunity to take advantage of Section 80TTB to claim up to Rs. 50, 000 in deductions on interest earned from bank FD, post office FD, and other deposits. This deduction helps lower the portion of interest income for seniors and ultimately reduces their tax burden. 

• Split FDs to Keep Interest Below Threshold Limits

An effective strategy is to divide your FD into different deposits with interest earnings staying below the Rs. 40,000 (Rs. 50,000 for senior citizens) mark for each deposit account to minimise the chance of TDS deductions being made by ensuring that the interest on each FD stays within the specified deduction threshold limit. 

Conclusion

Investing in an FD is a smart choice but it’s crucial to understand the implications of taxes and TDS involved in it. Employing strategies such as submitting Form 15G or 15H well as diversifying FD holdings across different banks or taking advantage of deductions under Section 80TTB for senior citizens can help lessen your tax obligations and retain a larger portion of your interest earnings. 

Remember that TDS on FD interest saving strategies should be in line with your objectives and investment timeline. By organising your decisions for FDs you can optimise the tax benefits and maximise the profits from your earnings with ease.