Tax on Interest on Fixed Deposits/Term Deposits

Will Tax be Deducted from Term Deposit Interest

Interest earned on Fixed Deposits is fully taxable and is added to your total annual income. The tax payable depends on your applicable income tax slab. Banks also deduct Tax Deducted at Source (TDS) on FD interest, as per the prevailing income tax rules. While filing your Income Tax Return (ITR), you must report the total interest earned and claim credit for the TDS deducted, if applicable. 

What About TDS or Tax Deducted at Source

Banks deduct Tax Deducted at Source (TDS) on Fixed Deposit interest if the interest earned in a financial year exceeds the prescribed threshold under the Income Tax Act. The applicable TDS rate is generally 10% if your PAN is linked. A higher rate may be applicable if your PAN is not linked. If your income falls under a higher tax slab, you may need to pay additional tax while filing your Income Tax Return (ITR). Similar TDS provisions also apply to Recurring Deposits (RDs), with TDS calculated on the total interest earned during the financial year. 

For example, Manish belongs to the tax bracket of 20% and has a Term Deposit of Rs.10,00,000 with a bank that provides an interest of 8% per year. The interest earned on the Term Deposit is Rs.80,000.

Manish will also have to pay interest earned on the tax rate equal to the gross income. Therefore, he will have to pay 20% of Rs.80,000 which is Rs.16,000. A TDS of 10% is deducted by the bank on the income earned from interest which is Rs.8,000.

Hence the balance amount of tax to be paid by Manish as a self-assessment tax will be 16,000-8,000 which is Rs.8,000.

Can TDS be Avoided on Term Deposits

Yes, there are a few ways through which individuals can avoid TDS on their Term Deposits. These include:

• Opting for a tax saving Term Deposit option is one way through which individuals can avoid TDS.
• These options generally have a compulsory lock in period of five years and the amount cannot be withdrawn prior to this.
• Individuals can submit Form 15G claiming that they do not earn a taxable income.
• Similarly, senior citizens will have to submit Form 15H.
• Distributing or splitting their term deposit investment so that none of the interest earned exceeds Rs.50,000 per year (or Rs.1,00,000 for senior citizens) is another way to avoid TDS (as of April 2025)
• Individuals can also procure their Term Deposit option in such a way that the interest will be split into two financial years, avoiding TDS.

By following some of the options provided above, individuals can avoid TDS on their Term Deposit interest. Term Deposits are one of the most commonly procured investment options by individuals and offers numerous benefits such as guaranteed returns and they fact that they are a risk-free option.