TDS on bank fixed deposit schemes: Your FD may not fetch 7-9% interest after tax

Investing in bank fixed deposit (FD) is considered to be safe and is a popular investment tool, But are you aware that the post-tax return on such investments is generally lower than the bank's offered interest rate. Yes, if you are getting an interest rate of 7 of 8 per cent on a term deposit, it does not mean that you will be getting the same rate post-tax deductions.

Amit Gupta, MD, SAG Infotech said that is because a 10% Tax Deducted at Source (TDS) is deducted from the fixed deposit income, which is added to the person's total income and taxed according to their tax slab.

“Individuals in higher tax brackets cannot claim the TDS back by filing their Income Tax Return (ITR), resulting in a lower post-tax return from fixed deposits,” said Gupta.

According to FundsIndia's Wealth Conversation Report in May 2023, the average interest rates for 6-month deposits in banks like SBI, PNB, HDFC Bank, and ICICI Bank are around 5%. However, the post-tax return is only 3.49%. Similarly, for 5-year deposits, the average interest rate is about 6.75%, but the post-tax return is only 4.9%.

Experts suggest diversifying investment portfolios with market-linked products like mutual funds for higher returns, as the generally higher long-term returns from such schemes compensate for the impact of taxation.

According to Vinit Khandare, CEO & Founder, MyFundBazaar investors should shift a portion of their investment portfolio to market-linked products like mutual funds for improved returns given the poor post-tax return from FDs.

Taxation on Mutual Funds

Vinit Khandare added that even mutual fund income is subject to taxation, although the normally higher long-term returns from such plans make up for the reduction in income brought on by taxes.

Advantages of fixed deposits

Despite this, fixed deposits have advantages, especially for investors with no or limited income sources and those earning below the basic exemption limits under old and new tax regimes.

Latest bank FD rates

Some banks have recently increased fixed deposit interest rates, with senior citizen depositors being offered up to 9.6% interest and others up to 9.1% interest.