Tax Deducted at Source (TDS) was introduced to collect tax from the income source. The Income Tax Department of the Government of India states that a person (deductor) liable to make a payment of specified nature to any other person (deductee) shall deduct tax at source and remit it to the central government.
The deductee, whose income has been taxed, is entitled to credit the amount deducted by submitting the Form 26AS or TDS certificate issued by the deductor. TDS is applicable for interest earned on fixed deposits. Here is all you need to know about FD investments and the tax applicable to your interest earnings.
How is TDS on fixed deposit interest calculated
Fixed deposits are great investment options across all age groups. They offer assured returns at low risk. But before you invest in FDs, you must understand the tax implications on the interest you are likely to earn.
Let us understand how TDS is charged on fixed deposits. First, banks, Non-Banks (NBFCs), and other lenders are liable to deduct a certain percentage of your interest earnings as TDS.
For banks, this number is 7.5% on the interest earned if the interest income for the year exceeds Rs. 10,000. This limit has been raised to Rs. 40,000 for regular citizens and Rs. 50,000 for senior citizens from FY 2019- 20. However, this limit is reduced to Rs. 5,000 in the case of a company FD.
But there is a catch if the interest you earn on FDs exceeds the amount mentioned above, and you have not shared your PAN details with your bank or NBFC, the TDS to be deducted doubles to 20% of the interest earned. However, in both cases, you have the option to submit your Form 15G or Form 15H if you wish that tax should not be deducted at the source. Here is how:
Form 15G and 15H
Forms 15G or Form 15H declare that your income is below the minimum tax slab for the particular financial year. Senior citizens are exempted from paying TDS on interest earned on fixed deposits if their total income from investments does not exceed Rs. 2.5 lakhs. They need to provide Form 15H. If the TDS has been applied and your total income is below the minimum tax slab, then you can claim a TDS refund on fixed deposit income while tax filing annual IT returns. Besides these benefits, there are many benefits of form 15G and 15H which you can see here.
Additional read: Premature withdrawal of fixed deposits
Invest in multiple FDs across different financiers
Another way to save on TDS is to spread your investment across lenders. For instance, if you have an Rs. 1 lakh investment in a company FD with a 10% interest rate, you get a return of Rs. 10,000, which is above the current threshold of Rs. 5,000. The company is mandated to deduct 7.5% tax at the source.
However, if you spread the investment of Rs. 1 lakh equally into two fixed deposits across two different companies, you would generate interest of Rs. 5,000 each. Since each company is only paying you an interest amount equal to the maximum limit, there will be no tax deducted by either company.
How you can offset the effect of TDS deduction with a high-interest income
Instead of only focusing on the TDS deduction, also look at the returns you are earning from the FD. With a lower return of bank FDs, it does not make sense to pay almost 30% (assuming you fall under a 30% tax slab) of your interest-earning in taxes if your interest-earning goes beyond these limits and you earn above the prescribed limits. Instead, go for high-yielding fixed deposits like Bajaj Finance FD, which offers 6.50% for a 5-year FD. This is easily 1-2% higher than bank FDs. For a senior citizen, this rate is 6.75%.
You will earn much more post TDS deduction and income tax deduction on your Bajaj Finance FD when compared to a bank FD.
To help make sense of your maturity amount and the interest income you are likely to earn on your FD, you can use the online fixed deposit calculator. It is a simple tool that helps you calculate the amount you will receive at the time of maturity of your deposit. It also enables you to calculate and compare the interest receivable by changing the deposit amount, tenor and interest payment frequency.
Time your FD investments differently
You can work out your investments so that the interest earned for the year does not exceed Rs. 40,000 (or Rs. 5,000 for senior citizens) in the same financial year. For instance, you can start a 12-month investment in October instead of April. Since the financial year closes on 31st March, the interest on your FD will be split across two financial years, and hence, the tax deduction is avoided.
Use these simple ways to minimize your TDS and make the most of fixed deposit investments. Bajaj Finance offers FDs high stability, flexible tenors, and returns up to 6.75%.
How you can ensure your annual interest income from FD doesn’t cross the TDS exemption limit
Bajaj Finance FD gives wide flexibility on the range of tenors from 12 months to 60 months which you can use to split and plan your fixed deposits. Short-term and long-term FDs will help you prepare for your goals seamlessly.
Additional read: Tax saving investments options
While care is taken to update the information, products, and services included in or available on our website and related platforms/websites, there may be inadvertent inaccuracies or typographical errors or delays in updating the information. The material contained in this site, and on associated web pages, is for reference and general information purpose and the details mentioned in the respective product/service document shall prevail in case of any inconsistency. Subscribers and users should seek professional advice before acting on the basis of the information contained herein. Please take an informed decision with respect to any product or service after going through the relevant product/service document and applicable terms and conditions. In case any inconsistencies observed, please click on reach us.
*Terms and conditions apply