In India, fixed deposit is one of the most popular investment options that help individuals to generate a fixed stream of income without exposing the capital to market fluctuations. The fact that interest accrued on fixed deposits comes under the purview of the Income Tax Act of India 1961 makes it liable for taxation. The rate of taxation is fixed as per one’s applicable tax slab.

For instance, the interest accrued on fixed deposit attracts TDS, if the same exceeds a given threshold. Ideally, such a tax is deducted as per the norms and rate set by the Income Tax Department of India.

To further understand the implications of TDS on FD interest and account for it accordingly, individuals must become familiar with its fundamentals.

What is TDS on Fixed Deposit?

Essentially, it is a form of tax that is subtracted at the source from the interest earnings accrued on a fixed deposit account. However, TDS is deducted only when it comes under the taxable category. Regardless of where an individual has opened an FD account, the interest on FD is taxable.

One must note that earnings generated from a tax-saving FD are also subject to TDS. In case of joint FD account holders, TDS on FD interest is deducted on the basis of the primary account holder’s PAN. It means that the secondary account holder is not responsible for deductions related to TDS on FD.

Who Deducts TDS on Fixed Deposit?

Financial institutions or banks offering the scheme are responsible for deducting TDS on fixed deposit interest. Generally, the TDS amount is deducted automatically at the end of every financial year.

TDS Rate on FD – In a Nutshell

The TDS rate on FD varies for different customers and depends on factors like – FD holder’s age, tax slab and PAN status.

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Ideally, TDS on FD is divided into these categories –

  • Indian Residents – TDS rate when PAN is shared

From the financial year 2020-2021, resident Indians will be liable to pay 7.5℅ TDS on the interest earned through their fixed deposits. It will be applicable if at any time the accrued earnings exceed Rs. 5,000.

  • Indian Residents and NRIs – TDS when PAN is not shared 

In this case, resident Indians have to pay a TDS on fixed deposit earnings at a rate of 20%. On the other hand, NRIs have to pay 30% + applicable surcharge and cess.

This table below offers a fair idea of the current TDS on FD –

Fixed deposit type Fixed deposit rate 
Fixed deposit 10% (It has been changed to 7.5% since May 2020)
Fixed deposit without PAN card 20%
NRO FD 30%
NRE FD Free of tax
FCNR FD Tax-free

What is the Exemption Limit for TDS Deduction on FD? 

These pointers enumerate the exemption limit for different entities –

  •  For company fixed deposit

In a financial year, the deduction limit is set at Rs. 5000.

  •  Income bracket

Individuals whose total taxable income is lower than Rs. 2.5 lakh are exempted from paying TDS on FD.

  •  For senior citizens

The TDS exemption limit for senior citizens in a financial year is Rs. 5000.

How is TDS Computed on FD? 

Look at this example below to gain an idea as to how tax is computed on FD.

Suppose Lisa has fixed deposit accounts of Rs. 3 lakh each with an NBFC and a bank. Each account fetches interest at the rate of 10% for 4 years.

As per calculation, the total interest earned collectively on both FD amounts to Rs. 60000 each year. So, the internet earned on the FDs is equivalent to –

= Rs. 60000×4

= Rs. 240000

As per tax norms, the TDS on FD interest will be liable for taxation at the rate of 7.5%

So, 7.5% of Rs. 60000

Rs. 4500

To avoid manual calculation, fixed deposit holders can also use TDS calculator online and find out the tax amount in a few steps. Doing so, they will simplify the calculation process and also minimise the risk of making any manual error.

How to Avail TDS Waiver on FD?

FD holders have the option to claim TDS deduction on fixed deposits under a suitable provision of Income Tax Act. For instance, FD holders can apply for TDS waiver on their fixed deposit earnings by declaring them through Form 15G or Form 15H. Subsequently, they must submit the same to their FD provider at the beginning of any given financial year.

One must note that these forms serve as a self-declaration stating that tax on total income in a financial year is zero. So, no TDS should be deducted from the interest accrued on FD as the ultimate taxable income is zero.

Other than that, individuals whose total income is less than the minimum tax slab can also claim for TDS refund on the tax paid. One can claim the refund only while filing Income Tax Returns.

Since individuals invest in fixed deposits to generate a steady source of income and boost savings, it is crucial to find out ways to protect it from eroding. Resultantly, individuals should find out how to make the most of TDS on FD interest to increase savings and minimise tax burden effectively. Also, those who cannot avoid TDS on their FD account must make it a point to file the same on time to avoid attracting penalty or other tax-related implications.