How can I save tax on the interest earned on a fixed deposit (FD)?

fixed deposit

Even though FDs offer you higher returns, your income from FDs is offered to you by the issuer after deducting TDS when your interest income exceeds the specified limit. As per the Interim Budget 2019, the limit for TDS on interest income from FDs has increased to Rs.40,000 from Rs.10,000 per annum on bank and post office FDs.

Banks will deduct TDS at the rate of 10% on your interest income if your PAN number is available with them. In case your PAN number is not available with them, you can expect a 20% TDS deduction on your interest income. So, take a look at a few other measures to help you save on taxes when you invest in an FD.

  • By furnishing Form 15G or Form 15H to your issuer

You can submit Form 15G and Form 15H to ensure that the issuer does not deduct TDS on your FD interest income. These are self-declaration forms stating that your income is less than the taxable limit and thus, no TDS should be deducted from your interest income. You have to submit Form 15G, if you are below the age of 60 years and Form 15H if you are a senior citizen. To avoid TDS on your interest income, you need to furnish these forms during the financial year to your issuer.

  • By investing on behalf of your parent or under HUF  

To save tax on your interest income, you can distribute your FD investment between you and your family members. For this, you can start one FD under your name and another one under your HUF, parent’s or spouse’s name. The issuer will treat each of these investments separately, thus helping you save on tax.

Also, Read Related Articles: Is FD Interest Taxable?

Apart from saving tax, you can invest in an FD under your parent’s name if they are a senior citizen and enjoy higher FD rates. This is because NBFCs like Bajaj Finance offer interest return of up to 9.10% to senior citizens for a Fixed Deposit with a minimum tenor of 36 months that offers returns at maturity. However, for a regular citizen, they offer an interest return of up to 8.75% on the same FD.

  • By investing at the right time

You can also lower your tax liability on your interest income by timing your FD such that you pay minimal taxes. For instance, you can invest Rs.2,00,000 for a 2-year FD in October to ensure that the tax liability gets split over two years instead of one. Apart from this, you can also ladder your investment by distributing funds into different FDs for varying tenors.

With these simple steps, you can minimize your tax liability on interest income from an FD. You can use the Fixed Deposit Interest Rate Calculator to know the interest income based on the FD interest rates that you are offered by your issuer in advance. Based on this, you can calculate your tax liability from beforehand and plan better.

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