How fixed deposit interest is taxed, and how TDS works

Interest is taxed as ordinary income

Interest earned on a fixed deposit is added to your total income and taxed at your income tax slab rate. There is no separate lower rate for FD interest. If you are in a higher slab, a larger share of the interest goes in tax, which is why the after-tax return can be noticeably lower than the advertised rate.

The tax is due on interest as it accrues each year, even if the deposit pays out at maturity. For a cumulative FD, you are expected to report the interest accrued each financial year rather than waiting until the deposit matures.

What is TDS?

TDS means tax deducted at source. If the interest a bank pays you in a financial year crosses a set threshold, the bank deducts tax before crediting the interest and deposits it with the government on your behalf. The threshold is higher for senior citizens, and it has been revised over the years, so check the current figure.

The rate is a fixed percentage if you have provided your PAN. If you have not, the deduction is at a much higher rate, so always make sure your PAN is linked to your deposits.

The threshold is generally applied per bank, so what matters is the total interest a single bank pays you across all your deposits with it.

TDS is not your final tax

TDS is an advance payment, not the final settlement. When you file your income tax return, you add all your income, calculate your actual tax and adjust for the TDS already deducted. If TDS was more than you owed, you claim a refund. If it was less, you pay the difference.

You can see the TDS deducted against your PAN in your Form 26AS or your Annual Information Statement on the income tax portal, which is worth checking before you file.

Form 15G and 15H: when TDS can be avoided

If your total income is below the taxable limit, tax would not be due on your interest, so TDS would just tie up your money until you claim a refund. In that case you can submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to the bank, declaring that your total income is not taxable, so it does not deduct TDS.

These forms are declarations you sign, and you should only submit them if your total income for the year really does fall below the taxable limit. They usually have to be submitted afresh every financial year.

Ways to plan around it

• Spread deposits across banks if you are near the threshold at one, remembering that the interest is still taxable regardless of TDS.
• Consider the tax-saver FD if you are under the old tax regime and want a Section 80C deduction, keeping in mind its five-year lock-in.
• Look at your after-tax return, not the headline rate, when comparing an FD with other options.

Get advice for your case

Tax rules and thresholds change, and your situation may differ. This is general information, not tax advice, so confirm the current rules on the income tax department's website or with a qualified tax professional.