Avoid TDS on Interest Earned from Tax Saving Fixed Deposit

Investing in a tax saving fixed deposit is a preferred option for individuals seeking safe returns while benefiting from tax deductions under Section 80C of the Income Tax Act. However, the interest earned on these deposits is subject to TDS (Tax Deducted at Source), which reduces the net earnings of the investor. This article explores how to minimize or avoid TDS on interest from tax-saving fixed deposits while ensuring compliance with tax regulations.

Understanding Tax Saving Fixed Deposit

A tax saving fixed deposit is a type of fixed deposit with a lock-in period of five years. It allows investors to claim deductions of up to ₹1.5 lakh under Section 80C. Although the principal amount qualifies for deductions, the interest earned is taxable.

Key Features of Tax Saving Fixed Deposits

●       Lock-in period: 5 years (premature withdrawal not allowed)

●       Eligible for tax deduction under Section 80C

●       Interest is taxable as per income slab

●       TDS deduction applicable if interest exceeds ₹40,000 (₹50,000 for senior citizens)

●       Available across most banks and financial institutions

●       Interest rates generally range between 5% and 7% per annum

Interest Payout Options

●       Cumulative FD: Interest is compounded and paid at the end of the tenure.

●       Non-cumulative FD: Interest is paid periodically (monthly, quarterly, or annually).

How TDS is Applied to Tax Saving Fixed Deposits

Banks and financial institutions deduct TDS at 10% if the total interest earned in a financial year exceeds the specified limit of ₹40,000 for regular depositors and ₹50,000 for senior citizens. If the depositor has not provided a PAN, the TDS rate increases to 20%.

The deducted amount is deposited with the Income Tax Department, and the depositor can claim a refund while filing the income tax return (ITR) if the total tax liability is lower than the deducted amount.

Example of TDS Calculation

If an individual invests ₹10 lakh in a tax saving fixed deposit at an interest rate of 6.5% per annum, they would earn ₹65,000 as interest in one year. Since this amount exceeds ₹40,000, TDS at 10% (₹6,500) would be deducted, leaving a net interest payout of ₹58,500.

Ways to Avoid TDS on Tax Saving Fixed Deposit Interest

1. Submit Form 15G or 15H

Individuals whose total income falls below the taxable limit can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to their bank. By doing so, banks will not deduct TDS on the interest earned.

●       Form 15G: For individuals below 60 years with an annual income below the taxable limit.

●       Form 15H: For senior citizens whose tax liability is zero.

2. Split Deposits Across Multiple Banks

To ensure that the interest earned from a tax saving fixed deposit does not exceed the TDS threshold, investors can distribute their fixed deposits across different banks. This strategy helps in keeping the interest earned per bank below ₹40,000.

3. Open Joint Fixed Deposits

Another way to reduce TDS liability is by opening a joint tax-saving FD with a family member. Since the interest is split between joint holders, it reduces the total interest earned under a single name, thereby minimizing TDS deductions.

4. Opt for Cumulative FDs

In cumulative FDs, the interest is compounded and paid at maturity instead of being credited annually. Since TDS is deducted when interest is credited, opting for cumulative fixed deposits ensures that TDS is deducted only at maturity, reducing annual tax outflows.

5. Invest in Senior Citizen Fixed Deposit

Senior citizens benefit from higher TDS exemption limits (₹50,000) under Section 80TTB. Investing in senior citizen fixed deposit helps in minimizing the impact of TDS deductions.

6. Plan Investments to Stay Below the TDS Threshold

Investors should calculate expected interest earnings before opening a tax saving fixed deposit to ensure they remain within the TDS-free limit. By adjusting the FD amount accordingly, they can optimize their tax savings.

7. Consider Alternative Investment Options

While tax-saving FDs offer security, other financial instruments provide tax-efficient returns. Some options include:

●       Public Provident Fund (PPF) – Tax-free interest and principal maturity.

●       National Pension Scheme (NPS) – Partial tax benefits under different sections.

●       ELSS (Equity Linked Savings Scheme) – Tax-free long-term capital gains up to ₹1 lakh.

8. Tax Benefits Under Section 80TTB

Senior citizens can claim a deduction of up to ₹50,000 on interest income under Section 80TTB, effectively reducing taxable income and avoiding unnecessary TDS deductions.

How to Claim a Refund for TDS Deducted

If TDS has already been deducted from a tax saving fixed deposit, investors can claim a refund when filing their Income Tax Returns (ITR). The refund process involves:

1. Checking Form 26AS – To verify the TDS deducted and deposited.

2. Filing ITR on Time – Declare the interest income and claim a refund if the total tax liability is lower.

3. Using the Correct ITR Form – Choose the right ITR form based on income sources to avoid discrepancies.

Comparing Tax Saving Fixed Deposits with Other Tax-Saving Instruments

Conclusion

A tax saving fixed deposit is a great investment option for individuals looking for guaranteed returns while enjoying Section 80C tax benefits. However, the TDS on interest earnings can impact overall returns. By submitting Form 15G/15H, splitting deposits, opting for joint accounts, and strategically planning investments, investors can effectively reduce or avoid TDS deductions.

Additionally, considering alternative investments like PPF, NPS, and ELSS can provide more tax-efficient returns. Proper tax planning and understanding of TDS regulations can help maximize savings and enhance financial security while complying with tax laws.