Fixed Deposit (FD): Taxes Explained


Fixed Deposit or FD, is a popular investment instrument that requires you to deposit a lump sum amount at a fixed interest. It is considered to be one of the safest investment instruments among RD, bank deposits, and others.

Interest earned on an FD is generally taxable but it’s tax-exempt up to a certain extent.

If you’re considering investing in fixed deposits, it is preferable for you to know how these returns might be taxed by the government. In addition to that, we will also help you understand whether any tax benefits exist on investment in FDs.

How is FD Interest Taxed?

Interest from your FD is considered as income by the government. The interest is added to your total income and is put under the head “income from other sources” in your income tax return. Once the total income is calculated after including your interest income from FD, you are taxed as per your income tax slab. 

However, this step comes later. Before this, if your interest earned is Rs. 40,000 and above or Rs. 50,000 and above if you are a senior citizen (as per budget 2019-20), there is some Tax Deducted at Source (TDS) by the bank or another financial institution.

This tax is deducted annually and not only when the FD matures. So note that, if you have an FD for 5 years – banks shall deduct TDS at the end of each year. 

In case your interest amount is less than Rs. 40,000 or Rs. 50,000 ( if you are a senior citizen) then the bank cannot deduct any TDS. You straightaway reach the step where you need to declare your interest income under the head “income from other sources” and be taxed as per the income tax slab.

TDS on Interest from Fixed Deposits

When you receive certain payments, the person paying you has to deduct tax before making the payment. This tax deducted is called Tax Deducted at Source or TDS and is paid to the Central Government by the deductor. 

Don’t worry, the TDS is not deducted over and above your total tax liability. When you add your interest income to your total income and calculate as per the income tax slab, then the net amount of tax that comes out is your total tax liability. This TDS is then adjusted against your final tax liability.

When does the bank not deduct TDS, based on your interest income:

In case your total interest income from all FDs with a bank is less than Rs 40,000 in a year, the bank is not allowed to deduct any TDS. In case you’re a senior citizen, the limit is Rs 50,000. Before budget 2019-20, the limit of TDS on interest income was Rs. 10,000.

If you provide your PAN card then TDS is deducted @10%:

Interest greater than Rs. 40,000 –  The bank estimates your interest income for the year from all the FDs you have with the bank. TDS of 10% is charged on the interest amount you earn if it is greater than Rs. 40,000. Before budget 2019, the limit of TDS on interest income was Rs. 10,000.

Interest less than Rs. 40,000 – If the interest amount is lesser than Rs. 40,000, in that case, no TDS is charged. Before budget 2019, the limit of TDS on interest income was Rs. 10,000. This has been done keeping in mind the interest of small depositors. 

If you don’t provide your PAN card then TDS is deducted @20%:

However, if you fail to provide your PAN card then the TDS will be deducted at the rate of 20%. The TDS deducted also depends on your income. 

What happens when your overall income is less than Rs. 2.5 lakh?

When your total income is less than Rs. 2.5 lakhs, no tax is deductible since your total income is less than the minimum taxable amount of the income tax slab. 

Even if some investors may have more than Rs 40,000 (or Rs. 50,000 for senior citizens) interest income in a year, they still won’t be taxed since their total income (including interest income) is less than the minimum exempt income (Rs 2.5 lakh for FY 2020-21). 

However, if your bank has already deducted TDS because your interest income is more than the limit of Rs. 40,000 (or Rs. 50,000 for senior citizens) then, you can submit Form 15G or 15H to claim interest income without TDS.

Tax-Saving Fixed Deposit (FD)

Tax saving fixed deposit is a special type of fixed deposit scheme which helps you in getting an income tax deduction under section 80C of the Indian Income Tax Act, 1961. An investor who makes an investment in a tax saving FD can claim a deduction on the investment amount up to Rs 1.5 lakh. The amount so invested is deducted from gross total income to calculate the net taxable income. 

These fixed deposits have a lock-period of 5 years and can offer interest rates between the range of 5.5% and 7.75%. However, the interest earned from these types of FD schemes is taxable. Most of the banks offer a bit higher interest rates on FDs to senior citizens as compared to the interest rate offered on the same FD to a non-senior citizen. However, post office RDs do not offer higher tax saving FD interest rates to senior citizens. 

As the lock-in period is 5 years, no premature withdrawals are allowed, nor can one take a loan against tax-saving FDs. Investment in tax-saving FDs can be done through any public or private sector bank except for co-operative and rural banks.

Important Features of Tax-Saving Fixed Deposit (FD)

  1. Eligibility: Individuals and HUFs are eligible to invest in tax-saving fixed deposits. However, a minor can also invest jointly with an adult.
  1. Amount Deposit: While there is no minimum amount to be invested, the maximum amount is capped at Rs. 1.5 lakh in a financial year. Yes, this is equivalent to the maximum amount of tax-saving investments one can make, under Section 80C of the Income Tax Act.
  1. Lock-in Period: The lock-in period for a tax-saving fixed deposit is 5 years.
  1. Premature Withdrawal: With a lock-in period of 5 years, no premature withdrawals are allowed in the case of tax-saving FDs.
  1. Loan Facility: Taking a loan against tax-saving FDs is not allowed.
  1. Nomination: The nomination facility is provided by tax-saving FDs. However, a nomination facility is not available in case the deposit is applied for and held by or on behalf of a minor.

TDS on Tax-Saving Fixed Deposit (FD)

Like in the case of a normal FD, the interest earned is subject to TDS as per the investor’s tax slab. The interest on these deposits is paid out on either a monthly/quarterly basis or it can be reinvested. The TDS can be avoided by submitting Form 15G (or Form 15H for senior citizens) to the bank if the total income, after including the interest income is less than the minimum taxable amount of the income tax slab.

For individuals, TDS is applicable if the total interest earned exceeds Rs 40,000 in a financial year with no change in the taxation of interest income. Senior citizens can claim a deduction up to Rs 50,000 on the interest earned from deposits under section 80TTB.

Post Office Time Deposit

Post Office Time Deposit (TD) is also an investment counted for deduction under section 80C of the Income Tax Act, 1961. The investment in a post office is almost similar to a bank FD but an investor can deposit only for 1 year, 2 years, 3 years, and 5 years. The deposit made for a 5-year duration qualifies for the Section 80C tax benefit.

Just like a tax-saving bank FD, the interest earned here is fully taxable and can be added to one’s “income from other sources”. The investment here is complete safety as the entire amount in post office time deposit is backed by a government guarantee. What’s especially remarkable is that even the interest rate is higher than bank FD in most cases. 

Note that Post office fixed deposits are transferable from one post office to another. They can be opened in both, “single” or “joint” mode. However, for a joint account, the tax benefit can only be availed by the primary account holder.

How much amount of FD Interest is Tax-Free?

A tax-saving FD is a popular tax-saving instrument that helps you in claiming a deduction on the investment amount up to Rs 1.5 lakh. However, the interest earned on tax-saving FD is still taxable.

Is a Fixed Deposit Under 80C?

Yes, a tax-saving FD is one of the tax-saving instruments under Section 80C of the Income Tax Act, 1961.

Is there any risk in Tax­-Saving FD?

Tax­ saving fixed deposits are absolutely risk-free. It offers guaranteed returns along with complete protection of the invested amount.

Written by

Priyanshi Bhardwaj