Fixed Deposits (FDs) continue to be one of the most widely used savings options in India due to their predictable returns and simple structure. However, the interest earned on FDs is taxable under Indian income tax laws, and many individuals look for ways to minimise their tax impact.
With greater access to digital financial platforms, including financial supermarkets, individuals can compare FD tax treatments, TDS rules, and exemptions more easily. Reviewing alternatives such as a loan against fixed deposit through these platforms also supports more informed financial planning.
How Interest on Fixed Deposits Is Taxed?
Taxation of FD interest follows straightforward rules but often affects overall earnings.
Interest Added to Total Income
FD interest is taxed according to the individual’s applicable income tax slab. Banks report interest income, and it must be declared even if the interest has not yet been credited to the account.
TDS Deduction on Interest
Banks deduct Tax Deducted at Source (TDS) if annual FD interest crosses the prescribed limit. This deduction applies even if the individual falls in a lower tax bracket. You may then need to claim a tax refund in such cases.
Reporting in Income Tax Returns
Interest earned is usually reported under the heading ‘Income from Other Sources’. Accurate reporting helps avoid discrepancies during assessments.
Methods to Save Tax on FD Interest Legally
Several provisions under Indian tax laws help reduce the burden of tax on FD interest.
Submitting Form 15G or 15H When Eligible
Individuals whose total taxable income falls below the basic exemption limit may submit Form 15G (for non-seniors) or Form 15H (for senior citizens) to request the bank not to deduct TDS. This is valid only if the individual meets the eligibility criteria.
Using the ₹50,000 Deduction for Senior Citizens
Under Section 80TTB, senior citizens can claim up to ₹50,000 annually on interest earned from FDs, recurring deposits, and savings accounts. This provides targeted relief to older individuals.
Splitting Deposits Across Family Members
If different family members hold separate FDs, the interest is taxed under each individual’s respective income. This may help reduce overall tax liability if family members fall under lower tax brackets.
Choosing Tax-Saver Fixed Deposits Under Section 80C
Tax-saving FDs offer deductions up to ₹1.5 Lakh under Section 80C. However, the interest earned on these FDs remains taxable, and they come with a mandatory five-year lock-in period.
Using a Financial Supermarket for Better Decision-Making
Digital platforms allow users to compare FD products, TDS rules, and tax-saving options in one place.
Transparent Comparison of Interest Rates and Tax Implications
A financial supermarket presents FD options from multiple institutions, along with details such as interest rate structure, payout options, and applicable tax treatments.
Guidance on Renewal, Payout Frequency, and Documentation
These platforms simplify understanding of TDS certificates, Form 26AS entries, and suggested steps for claiming refunds where necessary.
Visibility of Alternate Financial Products
Such platforms may provide insights into alternatives, including bonds, debt instruments, or other fixed-income investments that follow different tax rules.
Exploring Loan against Fixed Deposit as a Tax-Efficient Option
Sometimes individuals break their FD prematurely to manage urgent expenses, which also triggers tax implications.
How the Loan Structure Works?
A loan against fixed deposit allows borrowers to raise funds without breaking the FD. The loan amount is secured against the deposit, and the FD continues to earn interest as usual.
Why This Option Helps Avoid Tax Complications?
Since the FD remains intact, the interest continues to accrue without premature withdrawal penalties. Borrowers may use the loan temporarily and repay it when convenient.
Suitable for Short-Term Cash Requirements
This approach works well when immediate funds are needed but the FD is close to maturity or forms part of a long-term financial plan.
Impact of FD Payout Options on Tax Planning
The method chosen for receiving interest also influences the ease of tax calculation.
Cumulative vs Non-Cumulative FDs
Cumulative FDs compound interest, which becomes taxable annually on an accrual basis, whereas non-cumulative FDs pay periodic interest, making tax reporting simpler. Choice depends on individual preference and tax bracket.
Timing of Interest Income
Some individuals schedule deposits so that the interest falls in a financial year where their taxable income is lower. This provides minor administrative convenience but does not change the tax rule itself.
Common Mistakes to Avoid When Managing FD Interest Taxation
Avoiding these errors helps ensure smoother compliance.
Ignoring TDS Entries in Form 26AS
Cross-verifying TDS data with bank statements ensures correct tax calculations.
Assuming Tax-Saver FDs Are Fully Tax-Free
Only the Section 80C benefit applies; the interest itself remains taxable.
Not Declaring Accrued Interest Annually
Even if the FD matures later, tax is applicable annually on accrued interest.
Conclusion
You can save tax on FD interest by understanding the applicable tax rules, available exemptions, and smart planning options. In situations requiring immediate liquidity, exploring alternatives such as a loan against fixed deposit may prevent premature withdrawals and associated penalties. With informed planning and responsible financial decisions, individuals can optimise returns while maintaining tax compliance.
