If you are an individual looking to boost your savings without risking your hard-earned money, then Fixed Deposits (FDs) might be the right choice for you. Designed with a guaranteed interest rate, FD schemes are preferred by several Indian investors.
However, the financial institution offering you FD can deduct a portion of your earnings as Tax Deducted at Source (TDS) if your interest income exceeds a certain limit. In this blog, you will explore effective strategies on how to save tax on FD interest, ensuring you maximise your savings and keep more of your earnings in your pocket.
What Is a Fixed Deposit?
A fixed deposit is a secure method of managing your idle funds. You put your savings into it, and in return, you get a fixed interest rate for the time you choose. This interest rate stays the same during the whole time you hold the deposit. It is a low-risk investment option, good for individuals with long-term goals. When your FD investment matures, you get back your entire deposit, including the principal and interest amount.
What Are the Different Ways to Save Tax on FD Interests?
Here is a list of 4 essential tips you must consider on how to save tax on FD interest:
- Submit Form 15G or 15H
To save tax on FD interest, individuals below 60 years old should submit Form 15G to the bank if their total income falls below the taxable limit. Similarly, senior citizens can do the same by submitting the Form 15H. These forms declare that you are not liable for tax, preventing the issuer from deducting TDS on your FD interest.
- Diversify FDs Across Banks
Another way to reduce your tax liability is by opening fixed deposits (FDs) in different banks. Instead of putting all your money in one FD at a single bank, consider spreading it across multiple banks. This strategy ensures that your interest income at one particular bank stays below ₹40,000 in a financial year, preventing your bank from deducting TDS.
- Time Your FD Investments
You can also prevent TDS by timing your FD so that the interest earned in any financial year stays below ₹40,000. For instance, consider investing ₹2 lakhs in a 12-month fixed deposit with a 7.5% interest rate starting in September. Since the financial year ends on March 31st, the interest will be divided between two financial years, helping you avoid tax on FD interests.
- Choose Shorter FD Tenures
Choosing fixed deposits with shorter tenures can also help reduce your overall interest income compared to longer-term deposits. If short-term fixed deposits meet your needs, opt for them to keep your interest earnings below the specified threshold limit and save on taxes.
When Is Your FD Interest Taxable?
Your returns from fixed deposits fall under the ‘Income from Other Sources’ category under Section 56 of the Income Tax (IT) Act, 1961. However, the interests earned on your FD are only taxable if the accrued interest amount exceeds ₹40,000 per fiscal year.
If your deposit earnings exceed this limit, the issuer will deduct 10% of your total interest earnings as TDS. You need to submit your PAN card to avail this rate. Nevertheless, if you do not provide these details, the issuer will deduct 20% of your total interest earnings as TDS. Additionally, the TDS rate for NRIs is set at 30%.
The Bottom Line
Now that you know how to save tax on FD interest, by implementing the outlined strategies, you can optimise your fixed deposit investments. However, it is in your best interest to consult with an expert, offering personalised advice based on your financial situation and goals. For more insights into financial planning and investments, you can utilise online tools like Groww’s FD maturity Calculator to make informed decisions about your fixed deposits.
