Fixed Deposits: Can you save tax on FD interest? Key rules every depositor should know

A fixed deposit (FD) may look simple: you put money in the bank, earn guaranteed interest, and collect the maturity amount later. But many investors are caught off guard when the actual amount credited to their account turns out to be lower than expected due to tax deductions.

Suppose you invest ₹10 lakh in a bank FD offering 7.5% annual interest. At the end of one year, you expect to earn ₹75,000 as interest. But instead of the full amount, only ₹67,500 reaches your account. The missing ₹7,500 has been deducted by the bank as TDS or Tax Deducted at Source. This 10% deduction is not necessarily the final tax on your FD income.

FD interest is taxed at your slab rate

Interest earned on fixed deposits is treated as “Income from Other Sources” under income tax rules. It gets added to your total annual income and taxed according to the income tax slab applicable to you.

For example, if your annual salary income is ₹12 lakh and you earn another ₹75,000 from FDs, your taxable income becomes ₹12.75 lakh. The FD interest does not enjoy any special flat tax rate. It is taxed exactly like your salary income.

Under the new tax regime for FY 2025-26, the slabs are:

• Up to ₹4 lakh: Nil
• ₹4 lakh to ₹8 lakh: 5%
• ₹8 lakh to ₹12 lakh: 10%
• ₹12 lakh to ₹16 lakh: 15%
• ₹16 lakh to ₹20 lakh: 20%
• ₹20 lakh to ₹24 lakh: 25%
• Above ₹24 lakh: 30%

Under the old tax regime:

• Up to ₹2.5 lakh: Nil
• ₹2.5 lakh to ₹5 lakh: 5%
• ₹5 lakh to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

This means if you fall in the 30% tax bracket, the interest earned from your FD will also effectively be taxed at 30% plus cess. In the earlier example, while the bank deducted only ₹7,500 as TDS, your final tax liability on ₹75,000 could exceed ₹22,000. The balance tax must be paid while filing your income tax return.

This is also why many taxpayers receive notices for outstanding tax dues despite TDS already being deducted. TDS is only an advance tax collection mechanism, not the final tax.

FD interest is taxed every year

Another important rule many depositors overlook is that FD interest is taxable on an accrual basis.

This means you are liable to pay tax on the interest earned every financial year, even if the FD matures after several years and the interest has not yet been paid out.

So, if you have a 5-year cumulative FD, the bank calculates accrued interest each year and reports it for taxation purposes annually.

TDS rules every FD investor should know

Banks deduct TDS on FD interest once it crosses certain limits in a financial year.

• For regular depositors, TDS applies when total FD interest from a bank exceeds ₹40,000 in a financial year.
• For senior citizens aged 60 years and above, the threshold is ₹50,000.

If the total interest remains below these limits, the bank will not deduct any TDS.

PAN linkage matters

The standard TDS rate on FD interest is 10% if your PAN is linked with the bank account.

However, if PAN is not submitted or not linked properly, banks can deduct TDS at 20%, which can significantly reduce the payout.

The threshold applies bank-wise

A common misunderstanding is that the ₹40,000 threshold applies separately to each FD.

In reality, banks calculate the combined interest earned across all your deposits within that bank.

For instance, if you have three separate FDs in the same bank earning ₹15,000 interest each, the total interest becomes ₹45,000. Since it exceeds the ₹40,000 limit, TDS will be deducted even though no single FD crossed the threshold individually.

Taxation of post office fixed deposits

Post office term deposits are also taxable in a similar manner.

Interest earned on 1-year, 2-year, and 3-year post office deposits is fully taxable according to your slab rate. However, the 5-year post office time deposit additionally qualifies for deduction under Section 80C, subject to the overall limit of ₹1.5 lakh.

The same TDS thresholds of ₹40,000 for regular individuals and ₹50,000 for senior citizens apply.

How Form 15G and Form 15H help avoid TDS

For eligible taxpayers, there is a legal way to prevent banks from deducting TDS on FD interest altogether.

By submitting Form 15G or Form 15H to the bank, depositors can declare that their total taxable income is below the exemption limit and request the bank not to deduct TDS.

• Form 15G is meant for individuals below 60 years whose total taxable income is below the basic exemption limit.
• Form 15H is for senior citizens whose final tax liability for the year is nil.

Once these forms are submitted and accepted, banks stop deducting TDS from FD interest payments.