A fixed deposit is a type of savings account in which you can deposit a sum of money for a set length of time and earn interest on it. The depositor receives both the interest generated and the principle amount invested when the fixed deposit matures. Scheduled bank deposits, including FDs up to Rs5 lakh, are insured by the Deposit Insurance Guarantee Corporation of India (DIGCI), making them a relatively safe investment option with fixed returns.

If your net interest profits from fixed deposit investments exceed the minimum threshold amount stipulated by the Income Tax Act of 1961, your financier can deduct TDS on FD. The rate of TDS depends on the type of customer.

  1. For the residents of India, if the interest on the FD surpasses 40,000 for the financial year, TDS on FD interest will be deducted at a rate of 10% starting May 14, 2020.
  2. For the Indian customers who are not residents (NRI), TDS on fixed deposits will be deducted at 30% plus applicable surcharge and cess, as per section 195 of the Income Tax Act.
  3. If your lender does not have your PAN number, the following tax on FD interest will be deducted: 1. You will pay 20% plus relevant surcharges and cess if you are an Indian citizen. 2. You will pay 30% plus applicable surcharges and cess if you are an NRI consumer.

TDS on a cumulative FD is normally taken automatically by the bank if the interest on the FD exceeds a threshold set by tax laws. If the FD is held with a bank, this requirement is currently Rs 50,000 for senior people and Rs 40,000 for non-seniors. If the FD is held with a non-banking entity, the interest amount threshold for TDS deduction is Rs 5000.

When TDS is taken from the interest generated on a cumulative FD in a particular financial year, the FD loses not only the TDS amount, but also the compound interest it would have earned throughout the remainder of the deposit’s tenure. As a result, the real maturity amount you would get will not be the maturity amount displayed in FDR less the TDS amount, but will be further reduced by the compound interest that would have been earned on the TDS amount if the TDS had not been deducted.

Suppose you started a FD in your bank account for Rs15,00,000 for 3 years at 6% interest. The amount you will receive after the maturity will be lesser even after deducting the TDS from the maturity amount. This loss is just because the amount deducted as TDS did not earn compound interest subsequently during the term of the FD. This is called the undesired loss.


There are multiple ways to achieve this. Some of them are here as follows:

  1. By completing and submitting Form 15G/15H, the bank will not deduct any TDS on interest earned if an investor submits Form 15G claiming that he has no taxable income. The required form for senior folks to avoid TDS is 15H and for others is 15G.
  2. By dividing the deposit between multiple banks in such a way that the total interest earned on any of the FDs does not surpass $10,000. You can put money into the names of family members such as spouses, parents, and so on. For example, If you put Rs400,000 in fixed deposits that pay 10% interest, the interest earned will be Rs40,000, and the TDS deducted will be Rs4,000. Instead of investing the entire sum in your name, you can divide your money into Rs.100,000 and deposit in each of your father’s, mother’s, spouse’s, and your own names, bringing the interest per fixed deposit to Rs10,000. There would be no TDS deducted because the amount is less than/equivalent to Rs10,000. Although, the tax on fixed deposit interest income is computed for each individual, and the amount of tax they pay is determined by the slab rate they fall into. However, this may trigger the Income Tax Act of 1961’s clubbing rules, which combine your income with that of your spouse and other family members. Consult a CA, before you do anything.
  3. A person can open a fixed deposit in his or her personal bank account and another in his or her HUF account, and both will be processed separately. As a result, an investor with a HUF identity can divide the fund into two separate accounts.
  4. You can also avoid paying TDS if you time your FD so that the interest for any of the financial years does not reach $10,000. Because the financial year ends on March 31, a 12-month fixed deposit of 1 lakh at 10.5 percent might be started in September. TDS will be avoided because the interest will be divided over two financial years.
  5. You can open your FD in a post office branch instead of a bank. No TDS is deducted on post office fixed deposits. 
  6. You have the opportunity to invest at the proper time of year. TDS will be distributed in two years if the FD amount is made closer to the end of the financial year or the middle of the year. This may cause the interest calculation for a given year to be less than Rs 10,000, in which case no TDS will be deducted.

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