How to Save Tax on FD Interest? 4 Easy Ways

Tax Deducted at Source (TDS) is a crucial mechanism employed by the Income Tax Department to simplify tax collection directly from the source of income. When it comes to Fixed Deposits (FDs), banks are entrusted with the responsibility of deducting a predetermined percentage of the interest earned by depositors and promptly delivering it to the government as tax. This deduction is executed when the accumulated interest is credited to the depositor's account. 

By enforcing TDS on FD interest, the government aims to have a stable inflow of taxes, with a reduction in risk factors. With this approach, one can maintain their finances well and uphold the integrity and rules of the tax system, which will make an important contribution to the nation's economy.

Calculating TDS on FD Interest

The interest income generated from FDs is fully taxable and treated as "income from other sources." The TDS rate on FD interest depends on government policies and income tax regulations. Individuals can easily calculate their FD interest with the help of an FD Calculator, a free online tool available on the websites of leading banking institutions like ICICI Bank.  

For individuals with an interest income exceeding Rs 40,000 in a financial year, the TDS rate is 10%. However, the TDS rate is higher at 20% for those without a PAN card.

It's worth noting that individuals earning less than Rs 2.5 lakh annually are exempt from TDS on FD interest. Additionally, if the interest income from all FDs is below Rs 40,000, it is also TDS exempt.

Save Tax on FD Interest in 4 Easy Ways

1. Time Your FD Investments

An effective way to reduce tax liability on FD interest earnings involves strategic timing aligned with the financial year. For instance, initiating a 1-year FD in September allows for splitting interest earned between two consecutive financial years. 

This deliberate timing potentially keeps the interest accrued each year below the TDS deduction limits. By using this strategy, individuals can maximise the utilisation of available exemptions and deductions. 

Moreover, spreading the interest income across two financial years not only minimises the tax burden but also ensures efficient utilisation of tax-saving opportunities. This approach underscores the importance of proactive financial planning, enabling individuals to capitalise on favourable tax conditions and enhance overall savings.

2. Split FDs Between Accounts

Getting deeper into tax-saving strategies, individuals can use the method of splitting their Fixed Deposit (FD) investments between distinct account types, such as personal accounts and Hindu Undivided Family (HUF) accounts. 

This strategic segmentation of FDs lowers the interest income generated, thereby limiting the overall tax implications. By carefully allocating FDs across different account categories, individuals can effectively increase their tax savings while ensuring efficient management of their financial resources. 

3. Utilising Form 15G and Form 15H

To mitigate Tax Deducted at Source (TDS) on Fixed Deposit (FD) interest, individuals can leverage self-declaration forms, specifically Form 15G for those under 60 and Form 15H for senior citizens aged 60 and above. 

By submitting these forms to their respective banks, individuals declare that their income falls below the taxable limit, thereby exempting them from TDS deductions on FD interest. These forms serve as a declaration of non-taxable status, ensuring TDS is not deducted from their interest earnings as long as their income remains within the exemption limit prescribed by tax regulations. 

This proactive approach empowers individuals to retain more interest income, fostering financial stability and facilitating effective tax planning.

4. Utilise Tax Benefits for Senior Citizens

As per the Income Tax Act, senior citizens aged 60 years and above are entitled to specific privileges concerning tax deductions on FD interest. One such advantage is a higher exemption limit tailored for this demographic. 

Unlike individuals below 60 years, senior citizens enjoy a TDS exemption limit of Rs 50,000 annually. This elevated threshold provides them with additional avenues to minimise tax liabilities, enabling them to retain a greater portion of their interest income. 

This provision recognises the unique financial circumstances of senior citizens, aiming to alleviate their tax burden and facilitating enhanced financial planning and security during retirement years. Taking the help of this benefit is a straightforward method for senior citizens to optimise tax savings on their FD interest earnings.