How To Avoid Tax Deduction At Source On Your Fixed Deposit?

Fixed Deposits (FDs) continue to be one of the most popular saving instruments in India due to their assured returns, capital safety, and ease of management. However, many investors face challenges related to tax on FD interest. Interest earned on FDs is fully taxable, and banks are required to deduct Tax Deducted at Source (TDS) when interest exceeds certain limits. Fortunately, there are legal ways to avoid or minimise TDS liability if your overall income is within exemption limits.

Understanding tax deduction at source on fixed deposits

Banks and financial institutions deduct tax deduction at source on FD interest once it crosses the prescribed threshold in any financial year. TDS serves as an advance tax collection method to ensure timely tax remittance to the government.

As per current rules in 2025:

• For individuals below 60 years, TDS is applicable if the total FD interest exceeds Rs. 40,000 in a financial year.
  
• For senior citizens (60 years and above), the threshold is higher at Rs. 50,000.
  

The standard TDS rate is:

• 10% if PAN is submitted
  
• 20% if PAN is not provided or invalid
  

It is important to note that TDS is applicable on the interest income, not on the principal amount invested.

Calculation example for TDS deduction

Let us consider two scenarios:

For a non-senior citizen

• Total FD interest in the financial year: Rs. 65,000
  
• Threshold limit: Rs. 40,000
  
• Taxable interest for TDS: Rs. 65,000 – Rs. 40,000 = Rs. 25,000
  
• TDS @ 10%: 10% of Rs. 25,000 = Rs. 2,500
  

Thus, Rs. 2,500 will be deducted as TDS, and Rs. 62,500 will be credited to the investor’s account.

For a senior citizen

• Total FD interest: Rs. 70,000
  
• Threshold limit: Rs. 50,000
  
• Taxable interest for TDS: Rs. 70,000 – Rs. 50,000 = Rs. 20,000
  
• TDS @ 10%: 10% of Rs. 20,000 = Rs. 2,000
  

Therefore, Rs. 2,000 would be deducted as TDS.

Taxability of FD interest

While banks deduct TDS on FD interest, it does not mean that no further tax liability exists. The total interest earned on FDs must be declared as ‘Income from Other Sources’ while filing income tax returns. The applicable tax will be calculated based on the individual’s income slab. If the actual tax liability is lower than the TDS deducted, the investor can claim a refund while filing the return.

How to avoid TDS on FD interest legally

Several provisions allow eligible individuals to avoid TDS deduction at source while staying compliant with tax laws.

Submission of Form 15G and 15H

Individuals whose total income is below the taxable limit can submit self-declaration forms to prevent TDS:

• Form 15G: Applicable for individuals below 60 years whose total income is below the basic exemption limit (Rs. 3,00,000 for FY 2025-26).
  
• Form 15H: Applicable for senior citizens whose total income is below the basic exemption limit (Rs. 3,00,000 for FY 2025-26).
  

These forms must be submitted to each bank or financial institution where the FDs are held, preferably at the beginning of the financial year.

Spread FDs across different banks

Since the TDS threshold applies per bank, splitting FDs across multiple banks can help remain below the TDS limit with each institution. However, the entire FD interest still needs to be reported as taxable income in the ITR.

For instance:

• Bank A: Rs. 30,000 interest
  
• Bank B: Rs. 35,000 interest
  Total FD interest: Rs. 65,000
  

Although neither bank deducts TDS, the full Rs. 65,000 must be declared while filing returns.

Choose cumulative FD options

Selecting cumulative FDs, where interest is paid at maturity rather than periodically, can sometimes help delay crossing the annual threshold in the initial years, especially when multiple small deposits are made across banks.

Submit updated PAN details

Providing valid PAN details ensures TDS is deducted at 10% instead of the higher 20% under Section 206AA.

Assess the impact of joint accounts

In the case of joint FDs, TDS is generally deducted in the name of the first holder. Structuring joint accounts carefully may help optimise tax implications across family members based on their individual income levels.

Tax refund process if excess TDS is deducted

In cases where TDS has been deducted despite total income being below taxable limits, taxpayers can claim refunds by filing their Income Tax Return (ITR). The refund will be processed after assessment by the Income Tax Department.

For example:

• Total income including FD interest: Rs. 2,50,000
  
• Basic exemption limit: Rs. 3,00,000
  
• Tax liability: Nil
  
• TDS deducted: Rs. 2,000
  

In this case, the full Rs. 2,000 can be claimed as refund after filing ITR.

Limitations of avoiding TDS

While it is possible to avoid TDS deduction legally, it does not mean that the FD interest is tax-free. The entire interest earned must still be included while calculating total taxable income and paying tax as per applicable slabs.

Failure to disclose complete FD interest while filing returns may attract penalties and scrutiny from the tax authorities.

Importance of tax planning for FD investors

Effective tax planning can help optimise post-tax returns on FDs. Tools such as Form 15G/15H submission, distributing investments across family members, and accurately filing tax returns are important for managing tax outgo efficiently.

Summary

While banks are required to deduct tax deduction at source on FD interest exceeding Rs. 40,000 for individuals and Rs. 50,000 for senior citizens, investors whose income falls below taxable limits can avoid TDS by submitting Form 15G or Form 15H. For example, a senior citizen earning Rs. 70,000 FD interest may have Rs. 2,000 deducted as TDS unless the form is submitted. Additionally, valid PAN submission ensures TDS at 10% rather than 20%. Splitting FDs across banks or choosing cumulative options can also help manage TDS liability. However, total FD interest must always be declared in the ITR for accurate tax computation. Legal tax planning helps ensure compliance while minimising unnecessary deductions.Disclaimer: This article is intended for informational purposes only. Individuals must carefully assess all advantages, disadvantages and risks before participating or investing in the Indian financial market.