How Is TDS Deducted on FD Interest and How to Avoid It?

FDs remain one of the most preferred and safe investment vehicles in India. However, TDS on FD interest after crossing the threshold is taxable. Hence, depositors must know the TDS rules, limits and ways to prevent it to understand the tax efficiency of their investments.

What is TDS on FD Interest?

Tax deducted at source, commonly known as TDS, is a system in which tax is collected at source on the income earned. When a bank/post-office pays interest on an FD, it must deduct tax at a prescribed rate and deposit it with the government against your PAN.

For example, a 40-year-old Rohan earns ₹90,000 interest on his FDs with a bank during the year. Now, since his interest crosses the ₹50,000 threshold, the bank may deduct 10% TDS on FD interest, i.e., ₹9,000. Rohan would receive ₹81,000 interest after TDS, while the bank deposits the ₹9,000 TDS with the government in your name.

What is the TDS Threshold on FD Interest?

As per the rules of the Income Tax Department, here is the applicable threshold for TDS on FD interest for the year:

The threshold is applicable for aggregate interest earned on all your FDs with the same bank. For example, suppose you are earning ₹40,000, ₹20,000, and ₹10,000 respectively on each FD you have with the same bank; your aggregate interest is ₹70,000. The bank considers the aggregate interest while deducting the TDS.

Understanding TDS Rates on FD Interest

The following are the TDS rates applicable on FD Interest.

There is no TDS applicable on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) deposits.

It is important to note that the tax deducted at source is not your final tax liability. The final tax depends on your overall taxable income and applicable tax regime.

How is TDS Calculated on a Cumulative FD?

Even if you have booked a cumulative fixed deposit where interest is not credited to your bank account periodically, TDS is deducted on the accrued interest.

For example, let’s say a 40-year-old, Sunil, invests ₹15 lakhs in a three-year cumulative FD on 1st April at an interest rate of 6.5% p.a. That means interest on his FD accumulates every year and is paid along with the principal on maturity. However, TDS cannot be ignored even though he receives money after three years. The bank will deduct applicable TDS on interest earned and accumulated every financial year. Here is a year-wise TDS calculation.

(Important note: This is just an illustration based on the current TDS rates and rules. The TDS rules and rates applicable may change depending on updates in the Finance Act.)

Ways to Avoid TDS on FD Interest

There are many ways to legally prevent unnecessary TDS deduction. The following are some of the legitimate ways:

Keep Your Interest Below the Threshold

If your aggregate interest from a bank remains below the applicable TDS threshold, the bank will not deduct TDS. The threshold for senior citizens aged 60 years and above is ₹1,00,000, and ₹50,000 for others.

For example, Mr Mehta, aged 70, has an FD earning ₹85,000 interest during the year. Assuming he has no other relevant deposit interest with that bank, the amount is below the ₹1,00,000 threshold. Hence, the bank would generally not deduct TDS on his FD.

Remember that no TDS does mean no tax liability. The FD interest still needs to be included in taxable income.

Submit Form 121, If Eligible

From April 1, 2026, the Income Tax Department has replaced Form 15G and 15H with Form 121 for declarations seeking non-deduction of TDS under the new Income-tax Act, 2025. The eligible taxpayer can prevent TDS from being deducted by submitting the appropriate declaration can prevent TDS from being deducted. Remember, Form 121 can be submitted only if the eligibility conditions are satisfied.

Ensure You Keep Your PAN Updated with the Bank

An invalid, missing or incorrect PAN can result in TDS deduction at a higher applicable rate, i.e. 20%. Hence, updating your KYC and PAN information with the bank is a simple but important step to avoid higher deduction of TDS.

Spread Deposits Across Different Banks

Some depositors strategically distribute their deposits across banks to remain below the applicable TDS threshold. For example, if an FD with Bank A earns ₹30,000 and an FD with Bank B earns ₹45,000, there will not be any TDS deducted as both remain below the applicable TDS threshold independently.

However, this only avoids TDS deduction, not the final tax on FD interest. You need to report the total interest earned on your FDs for the financial year in your income tax return and pay applicable taxes.

Explore fixed deposits from various banks on the JioFinance app.

Conclusion

FD is an investment that offers guaranteed returns and stability. However, the tax treatment of your investment is an important consideration. You can minimise unnecessary TDS on your FD interest in many legitimate ways, like PAN updation, Form 121 submission and more. Remember, TDS and tax liability are not the same thing; you can claim excess TDS deducted in your tax refund.