Fixed Deposits (FDs) are popular savings tools in India. They offer guaranteed returns and are considered safe investments. However, the interest earned on FDs is taxable. 

Understanding Tax on FD Interest

Interest earned from FDs is added to your total income and taxed as per your income tax slab. This means if you are in the 20% tax bracket, the interest you earn from FDs will be taxed at 20%. The tax can reduce your overall returns. Thus, it is essential to understand ways to minimise this tax.

Following strategies could help minimise the taxes you would have to pay on the fixed deposit interest:

1. Use of Form 15G and Form 15H

If your total income is below the taxable limit, you can submit Form 15G or Form 15H to your bank or NBFC. This will prevent the bank from deducting Tax Deducted at Source (TDS) on your FD interest.

• Form 15G: For individuals below 60 years of age
• Form 15H: For senior citizens above 60 years of age

You must submit these forms at the start of the financial year to avoid TDS.

2. Split Your FD Investments

Splitting your FD investments across different banks or NBFCs can help reduce tax. Each bank deducts TDS only if the interest earned exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year. By spreading your investments, you can keep the interest earned in each bank below this threshold.

3. Opt for Cumulative FDs

In cumulative FDs, the interest is compounded and paid at the end of the tenor. By choosing cumulative FDs, you can defer tax liability to a future date, potentially reducing the tax you pay.

4. Invest in Tax-saving FDs

Tax-saving FDs have a lock-in period of five years. They qualify for a deduction under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to ₹1.5 Lakh in a financial year. However, the interest earned on these FDs is taxable.

5. Spread FDs Over Financial Years

You can manage the interest income by spreading your FD investments across different financial years. This strategy helps reduce the overall taxable interest in a single year. It can potentially lower your tax burden.

6. Joint FDs

Opening a joint FD account can help reduce tax liability. The interest earned on a joint FD can be split between the account holders. This can potentially reduce the tax for each holder if they are in different tax brackets.

7. Use of an FD Tax Calculator

An FD tax calculator helps you estimate the tax liability on your FD interest. It is a simple tool where you input your FD details like principal amount, interest rate, tenor, and your tax slab. The calculator will then show you the tax you need to pay. This can help in planning your investments better.

Income Tax Provisions

According to the Income Tax Act, 1961, banks or NBFCs deduct TDS at 10%. This deduction applies if the interest earned exceeds ₹40,000 in a financial year. For senior citizens, the threshold is ₹50,000. If you do not submit your PAN, TDS will be deducted at 20%. You can claim a refund for any excess TDS deducted when you file your income tax return.

Additional Tax-saving Strategies to Consider 

The above strategies cover the basics. There are additional ways to further optimise your tax savings on FD interest.

1. Use Tax-free Bonds

Consider investing a portion of your savings in tax-free bonds. These bonds are issued by government-backed entities and offer tax-free interest. They may offer lower interest rates compared to FDs. However, the tax-free nature of the returns can be attractive for those in higher tax brackets.

2. Diversify Across Investment Options

Diversification is key in managing tax liabilities. Alongside FDs, consider other investment options. These include the Public Provident Fund (PPF). They also include the Equity-Linked Savings Scheme (ELSS) and the National Savings Certificate (NSC). Each of these has different tax implications. They also offer benefits under Section 80C of the Income Tax Act, 1961.

3. Utilise HUF Accounts

If you belong to a Hindu Undivided Family (HUF), you can open an FD in the name of the HUF. The interest earned will be taxed in the hands of the HUF. The HUF might have a different tax slab compared to individual members. This can help in spreading the tax liability.

4. Leverage Senior Citizen Benefits

For senior citizens, there are specific schemes and higher exemption limits. The Senior Citizens Savings Scheme (SCSS) offers tax benefits. It can be a good alternative to regular FDs. The interest earned is taxable. However, the scheme itself qualifies for deductions under Section 80C.

5. Regular Review and Adjustment

Tax laws and financial regulations can change. It is important to stay updated and review your investment strategy regularly. Adjust your investments to align with new provisions. Make changes based on your financial situation.

Conclusion

Minimising tax on FD interest requires smart planning and understanding of tax laws. By using various strategies, you can reduce your tax liability. Submit Form 15G or Form 15H, split your FD investments, or opt for cumulative FDs. Lastly, invest in tax-saving FDs. 

An FD tax calculator can also help in planning your investments better. Always stay informed about the latest tax provisions. This will help you maximise your returns from FDs. Diversify your investments and use tax-saving tools to optimise your financial plan.