TDS On FD Interest: How Much Tax Is Deducted On Interest Earned From FD

Fixed Deposits (FDs) are among the most popular investments in India due to their security and guaranteed returns. However, not many people are aware of the tax impact, particularly the Tax Deducted at Source (TDS) on interest earned from FDs. Knowing the TDS process and the amount of tax deducted is important for FD investors as it will have a direct impact on their net return.

What is TDS on FD Interest

Tax Deducted at Source (TDS) is a tax-collection mechanism of the government at the source of income creation. Banks deduct TDS and credit the interest in your account when you accrue interest on your FD. TDS deduction will be levied on the aggregate of the individual's interest income within a financial year.

Currently, TDS on FD interest is 10 per cent if the total income earned from interest is above Rs 40,000 in a financial year for taxpayers who are less than 60 years old. For senior citizens (60 years and older), it is capped at Rs 50,000. This means that if interest income is above these figures, TDS will be levied by the bank at 10 per cent. For example, when you receive Rs 50,000 interest on your FD and you are a normal taxpayer, the bank charges Rs 5,000 as TDS (10 per cent of Rs 50,000).

Budget 2025 Proposal to Increase TDS Limit

The government of India, in its Budget 2025 document, has proposed raising the TDS limit for regular taxpayers. Currently, the limit for non-senior citizens is Rs 40,000 per annum for interest received on Fixed Deposits. The proposed increase will raise this limit to Rs 50,000. This will cut down the tax burden for taxpayers whose income from interest on their FDs is not in excess of the limit proposed.

The change is likely to take effect from April 1, 2025, as the new financial year begins on that date. Therefore, taxpayers earning up to Rs 50,000 of interest income will no longer need to pay TDS, a relief to many. Significantly, the current Rs 50,000 limit for senior citizens will be raised up to Rs 1 lakh.

TDS and Tax Regimes: Old vs. New Tax Regime

In India, taxpayers (except those who are earning from a profession or business) can opt for either the old tax regime or the new tax regime. The old tax regime offers exemptions and deductions, say under Section 80C (for investment in PPF and ELSS) or Section 80D (for health insurance premiums). But the new tax regime offers fewer tax slabs, but no exemptions or deductions.

No matter which tax regime you opt for, the TDS on the interest of FD is levied at a constant rate of 10 per cent if the interest income exceeds the threshold limit. The total tax liability of the FD holders will vary depending on the tax regime they have opted for. In the old tax regime, it is perhaps possible to claim a deduction to mitigate tax payments, whereas in the new tax regime, the tax is imposed at lower rates without exemptions.

Avoiding TDS on FD Interest

While TDS is automatically deducted on interest accruing over the prescribed limit, exemption from TDS for eligible citizens is also possible. If your overall income to be taxed is less than the tax threshold (Rs 2.5 lakh for individuals), you can provide Form 15G (for non-senior citizens) or Form 15H (for senior citizens) to the bank. These forms verify that your overall income is under the taxable limit and thus exempt from TDS deductions.

Apart from that, if your entire interest earned under all FDs is less than Rs 40,000 (Rs 50,000 for senior citizens), TDS will not be deducted. Even in those instances, filing Form 15G or 15H may assist to the extent that no TDS gets deducted even though your interest income exceeds the limit but your aggregate taxable income remains less than the exemption threshold.

TDS on interest on FD is crucial to the investor to budget finances properly and not face surprises at the time of tax. TDS is deducted at a flat rate of 10 per cent where the interest received is over the threshold level. Taxpayers need to be aware that they may choose to be out of the old regime and move to the new regime. They can avoid unwanted TDS and get a bigger part of their FD returns by furnishing the proper forms or limiting their aggregate income to the allowed level.