How to Save Tax on FD Interest: Tips and Tricks

Fixed Deposits (FDs) are a well-known savings tool in India, offering a fixed interest rate and lower risk compared to other investments. However, the interest earned on FDs is subject to tax, which prompts many investors to look for ways to reduce their tax burden. Understanding how to save tax on FD interest and applying the right strategies could help optimise the returns from an FD investment.

Understanding Tax on FD Interest

Interest earned from an FD issued by banks or NBFCs is considered part of your taxable income. It is added to your total income for the year and taxed according to your income tax slab under the Income Tax Act, 1961. There is no separate tax rate for FD interest. If your total income for the year, including FD interest, exceeds the minimum exemption limit, you may need to pay tax.

FD interest is subject to Tax Deducted at Source (TDS). If the interest earned in a financial year exceeds ₹ 40,000 (₹ 50,000 for senior citizens), the bank or NBFC could deduct 10% TDS. If you don’t provide your Permanent Account Number (PAN), TDS could increase to 20%.

Tips to Save Tax on FD Interest

Though you cannot avoid taxes altogether, there are legal ways to reduce the amount of tax you pay on your FD interest. Below are some tips that may help you minimise your tax liability.

1.Submit Form 15G or 15H

If your total income is below the taxable threshold, you can prevent TDS deductions by filing Form 15G (for individuals under 60) or Form 15H (for senior citizens). These forms indicate that your income is below the required limit, exempting you from TDS. It is recommended to submit the form at the start of the financial year to avoid any unwanted deductions.

For example, if your total annual income is below ₹ 2.5 Lakhs (₹ 3 Lakhs for senior citizens and ₹ 5 Lakhs for those above 80 years), you may be eligible to submit Form 15G or 15H.

2.Spread FD Investments Across Multiple Banks

FD interest is subject to TDS if the interest earned from one bank or NBFC exceeds ₹ 40,000 in a financial year. To reduce the TDS liability, you could consider spreading your investments across multiple banks. By ensuring that the interest from each bank stays below the threshold, you may avoid TDS deductions altogether.

3.Invest in the Name of Family Members

Another way to lower your tax burden is by investing in the names of family members who fall in a lower tax slab or do not have taxable income. If you open FDs in the name of your spouse, parents, or children, the interest earned may either be taxed at a lower rate or not taxed at all if their total income is below the taxable limit.

However, be aware of the clubbed income rule under the Income Tax Act, 1961. If the income of your spouse or minor child is a result of a gift or investment made by you, it could be added to your taxable income.

4.Opt for Cumulative FD

In a cumulative FD, the interest is compounded and paid out only at maturity, rather than at regular intervals. This could help you defer the tax liability until the end of the FD tenure. Since the interest is not received annually, it is not taxed each year. This is different from non-cumulative FDs, where interest is paid out periodically and taxed in the year of receipt.

By deferring the interest payout, you may also benefit from Section 80TTB of the Income Tax Act, 1961, which allows senior citizens to claim a deduction of up to ₹ 50,000 on the interest earned from FDs and savings accounts.

5.Choose Tax-saving FD Schemes

Some banks and NBFCs provide tax-saving FDs that qualify under Section 80C of the Income Tax Act, 1961. You can invest up to ₹ 1.5 Lakhs in these FDs, and the invested amount can be deducted from your taxable income. However, these FDs come with a five-year lock-in period, during which premature withdrawals are not permitted.

While the invested amount qualifies for tax deductions, the interest earned on these FDs is still taxable. Combining tax-saving FDs with other Section 80C instruments, such as the Public Provident Fund (PPF) or National Savings Certificate (NSC), may help you maximise overall tax benefits.

Tax Deductions for Senior Citizens

The Income Tax Act, 1961, offers specific tax benefits for senior citizens. According to Section 80TTB, individuals aged 60 and above are eligible for a deduction of up to ₹ 50,000 on interest earned from savings accounts, Fixed Deposits (FDs), and recurring deposits. This provision is designed to help reduce their overall tax liability. Additionally, senior citizens can submit Form 15H to avoid TDS if their annual income is below ₹ 3 Lakhs, or ₹ 5 Lakhs for those aged over 80.

Book an FD Online for Easy Management

To efficiently manage your investments and paperwork, you could book an FD online. Many banks and NBFCs offer online platforms where you can compare FD interest rates, select tenures, and submit necessary documents like Form 15G or 15H digitally. Online platforms also allow you to monitor your interest earnings, maturity dates, and tax liabilities in real time, simplifying the investment process.

How Interest is Taxed on FDs with Joint Accounts

In the case of joint FDs, the interest income is taxable in the hands of the first account holder. So, if you open a joint FD with a family member who falls in a lower tax slab, the tax liability could be reduced. However, it is essential to ensure that the first holder’s PAN is provided to the bank or NBFC, as TDS will be deducted based on that.

Conclusion

While FDs are a low-risk savings tool, the interest earned is taxable. By using the tips mentioned above, you could reduce the tax burden on your FD interest. Submitting forms, spreading investments, investing in family members’ names, and choosing tax-saving FDs are some ways to help you manage your tax liability. Additionally, senior citizens could benefit from specific deductions available to them under the Income Tax Act, 1961.

Always ensure that you stay updated with the latest tax regulations and consult with a tax professional, if needed.