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One of the key reasons why fixed deposits are popular investment avenues is that your earnings remain unaffected by market volatility. This is one of the key reasons why most Indians prefer FDs, as per a survey from earlier in 2023. What’s more, 23% of investors prefer to park their funds in an FD to beat inflation.
While this investment mode is known to generate handsome and reliable returns, you must not overlook the tax liabilities when it comes to a fixed deposit investment. Since the interest you earn from an FD forms a part of your annual earnings, it is subject to taxation.
That said, there are certain strategies you can implement to minimise your tax liability. One of the most popular options is to invest in a tax-saving FD. Read on to know more about this type of fixed deposit and ways to reduce the TDS on FD interest, which is deducted by issuers.
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What is a Tax-Saving FD?
Investing in a tax-saving FD is one of the effective ways to save on taxes. In this type of fixed deposit, you can claim a tax deduction of up to ₹1.5 Lakhs as per Section 80C of the I-T Act, 1961, on the amount you invest in a 5-year FD.
You can book these deposits as a single holder or in a joint account. However, in the case of a joint holding, the tax benefit applies only to the first holder. These deposits have a compulsory lock-in period of 5 years, and both HUFs and individuals can claim these deductions.
Booking a tax-saving FD is similar to a normal fixed deposit. Likewise, the interest earned on a tax-saving FD is taxable. However, in this case, you must deposit a lump sum amount for a specific tenor of 5 years.
While regular FDs allow premature withdrawal by charging a minimal penalty, you cannot do so in a tax-saving FD. The maturity amount gets credited to your savings account at the end of the FD tenor.
With banks and NBFCs offering competitive tax-saving FD interest rates, you can invest in these deposits to earn good returns. Since these fixed deposits do not allow premature withdrawals, you must consider your financial goals before booking a tax-saving FD.
Also, unlike regular FDs, you cannot avail a loan against these tax-saving fixed deposits. And, if you are a senior citizen, you are likely to get higher tax-saving FD interest rates compared to non-senior investors.
What are the Features of a Tax-saving FD?
Here are some essential characteristics of this type of FD. You can:
- Stable returns as tax-saving FD interest rates are not affected by market fluctuations
- Tax benefits of up to ₹1.5 Lakhs every year on your invested amount
- Compulsory lock-in period of 5 years
- Nomination facility to assign a nominee for your tax-saving FD
- Option to book an FD with a joint holder or individually
- Flexible interest payouts, such as every month, quarter, or year, based on your convenience or needs
- Reinvest the interest and receive it, along with the principal amount after the FD matures
- Account for TDS on FD interest, which is applicable when you book a tax-saving FD
- No auto-renewal facility
When is TDS on FD Deducted?
There are certain conditions on the basis on which TDS on FD interest is deducted. A TDS of 10% is levied when your interest income for a particular year exceeds ₹40,000. This is the scenario for regular or non-senior investors.
If you are a senior citizen, TDS on FD interest is relaxed. This is applicable only when the interest earnings exceed ₹50,000 for a financial year. However, note that in the above instances, the TDS deduction applies for the entire amount once it crosses the threshold limit.
Knowing the current FD rates is crucial before booking an FD. This helps you assess the actual returns you stand to receive after the TDS deduction. You can easily compute your interest earnings using an FD calculator.
All you have to do to determine your returns is enter the FD investment amount, interest rate and tenor in the calculator. This simple online tool lets you calculate your FD earnings conveniently.
What are the Different Ways by Which You Can Reduce TDS on FD?
Implementing these tips and strategies can help you minimise the tax liability on your FD.
Provide Form 15G/15H to the Bank
Submitting these forms is a declaration that your income is below the taxable limit. This makes you exempt from TDS deductions on your interest earnings.
Remember that Form 15G applies to non-senior citizens, while senior investors need to submit Form 15H. You must submit these forms only if your total income does not cross the minimum taxable threshold.
Book a Deposit in Your Family Member’s Name
To minimise the impact of TDS on FD, you can book an FD in the name of your family members who are exempt from TDS.
Bifurcate Your Fixed Deposits
Rather than depositing a huge sum in a single FD, you can consider splitting the total amount across multiple FDs. Doing this can minimise your tax liability. This is because TDS threshold limits of ₹40,000 and ₹50,000 are applicable on a single fixed deposit and not on multiple FDs.
However, remember, this does not reduce the tax implication on your FD interest earnings. TDS will simply be adjusted in your income tax payments, and if it is not deducted, you will pay tax on gains as per your slab.
Now that you know strategic ways to minimise TDS on FD and the advantages of starting a tax-saver FD, you can book one to reduce your tax liability. Note that the financial institution where you book your FD calculates your yearly income to apply TDS on FD interest.
Also, your TDS is calculated based on the interest income for a financial year, not the principal amount. So, you can book a tax-saving FD to minimise the tax implications on the principal amount. Simply evaluate your financial objectives and choose an FD scheme that best aligns with your short-term and long-term goals.
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Disclaimer: The information provided in this content is intended for general informational purposes only and should not be considered as tax advice or financial guidance. While efforts have been made to ensure the accuracy and completeness of the information, it is subject to change and may not reflect the most current legal or tax regulations. Readers are encouraged to consult with qualified tax professionals, financial advisors, or legal experts to obtain personalized advice regarding their specific financial situations and tax liabilities. Any decisions or actions taken based on the information contained in this content are the sole responsibility of the reader. The mention of specific tax-saving strategies, such as Form 15G/15H submissions, deposit bifurcation, or investment in tax-saving fixed deposits, does not constitute an endorsement or recommendation. The effectiveness of these strategies may vary based on individual circumstances, and readers are advised to assess their suitability and applicability carefully. It is essential to consider all relevant factors and conduct thorough research before making any financial decisions. The authors and publishers of this content, as well as taxguru.in, disclaim any liability for any errors, omissions, or inaccuracies in the content or for any actions taken based on the information provided herein.
Author Bio
It is not correct to say that by splitting FD’s into smaller values TDS can be avoided. TDS is deductible if the total interest earned in a Bank exceeds the limit (40000 or 50000). Also depositing in one’s wife’s or minor children’s names can only avoid TDS. Tax is payable on interest from such deposits under ‘clubbing provisions’ of the IT act – the interest is to be added to the income of the person whose money is invested