TDS on Fixed Deposit Interest: Rate, Limit & Exemption

Tax Deducted at Source is a mode of tax collection that works on the “Pay Tax as you Earn” pattern. It is a means of collecting income tax in India under the Indian Income Tax Act of 1961.

Here, the entity or person making a payment is responsible for deducting tax at the source if the payment exceeds certain threshold limits. The tax so deducted must then be remitted to the Central Government.

TDS is applicable on various incomes, such as salaries, interest payments, commission payments, professional fees, rent, etc.

The tax authorities prescribe the rates of TDS and the threshold limits which can vary depending on the nature of the payment and the status of the recipient (e.g., individual, company).

The main reason behind introducing TDS is to minimise tax evasion by collecting tax at the time the income is generated rather than at a later date.

Interest from fixed deposits is fully taxable in the hands of an investor. They are added to an investor’s taxable income under the head “Income from Other Sources”, and attract tax as per the applicable income tax slab rate.

For example, suppose an individual earns ₹1 lakh as interest from FDs in a financial year and falls under the income tax slab of 30%. It means that he will have to pay a tax of ₹30,000 (30% of ₹1 lakh) on his FD interest income.

TDS on FD Interest U/S 194A

As per Section 194A of the Income Tax Act, banks and financial institutions must deduct TDS from FD interest (if it’s above a certain threshold) before depositing it in the investor’s account. Until the Financial Year (F.Y.) 2024-25, the threshold for TDS deduction for FD interest for individuals, barring senior citizens, was ₹40,000. For senior citizens, this threshold was ₹50,000.

However, from F.Y. 2025-26, the FD interest exemption limit for TDS has been raised to ₹50,000 for normal citizens and ₹1 lakh for senior citizens.

Additionally, individuals whose total taxable income falls below the basic exemption limit of the income tax qualify for a waiver from TDS deductions on their FD interest. The basic tax exemption limits are as follows:

• ₹2.5 lakh for Individuals below 60 years
• ₹3 lakh for Individuals between 60 - 80 years
• ₹5 lakh for Individuals above 80 years
• ₹4 lakh for those who have opted for the new tax regime

How Much Tax on FD Interest: Rate for TDS on FD Interest

The prevailing rates for TDS on FD interest are as follows:

Note:

The bank FD interest TDS limits and conditions are based on information relevant to the
Assessment Year 2025-26 and may be subject to change. Always refer to the latest tax regulations or consult a tax professional for the most current information.

If an individual does not owe any taxes, banks are not permitted to deduct TDS. In such cases, the individual needs to submit Form 15G or 15H, which allows them to claim interest income without the deduction of TDS.

Early Tax Collection: TDS serves as a method to collect tax at the source of income, ensuring that tax is collected in advance rather than at the end of the financial year. This helps in spreading the tax collection throughout the year and aids in the early receipt of tax revenues by the government.

Minimising Tax Evasion: By deducting tax at the source, the government minimises the chances of tax evasion, ensuring that all taxable income is reported and taxed accordingly. It acts as a built-in system to capture tax on income as soon as it is generated.

Ease of Tax Payment for Depositors: TDS on FDs simplifies the process of tax payment for the depositor. Since the tax is automatically deducted and remitted to the government by the bank, the depositor is relieved from the responsibility of paying tax on the interest earned, providing a hassle-free way of meeting tax obligations.

Record Keeping: TDS on FDs also assists in record-keeping for both the tax authorities and the depositor. The bank provides a TDS certificate (Form 16A) to the depositor, which details the amount of tax deducted and can be used by the depositor to claim the tax credit. This ensures transparency and ease of documentation when filing annual tax returns.

The TDS is deducted from the interest income earned in a certain manner and during the specified period as defined below.

Banks calculate the interest income earned by an individual from all the FDs held with them during the financial year.

Consider the following illustration to gain a better understanding.

Case 1 – An individual earns ₹80,000 as FD interest in a financial year from multiple FDs in the same bank. Since this amount exceeds the threshold limit of ₹50,000, the bank will deduct a TDS of ₹8,000 (10% of ₹80,000). If the investor hasn’t submitted his PAN details to the bank, the tax on interest on FD will be ₹16,000 (20% of ₹80,000).

Case 2 – An individual earns ₹80,000 as FD interest in a financial year from multiple FDs in different banks. However, none of the banks pays him an interest of more than ₹50,000 in a financial year. In this case, although the total FD interest for the year exceeds ₹50,000, no TDS will be deducted by the banks.

Assessment Against Threshold: The bank assesses this interest income against the prescribed threshold limits. According to current regulations, TDS is deducted on interest income exceeding ₹50,000 for individuals and ₹1 lakh for senior citizens.

Deduction at Source: If the interest income surpasses these thresholds, the bank deducts TDS at the rates specified by the income tax laws before crediting the interest to the depositor's account.

PAN Requirement: The rate of TDS can vary depending on whether the depositor has provided their Permanent Account Number (PAN) to the bank. The standard TDS rate is 10% if a PAN is furnished; however, it escalates to 20% if the PAN is not provided.

When is TDS on Fixed Deposits Deducted?

TDS on FDs is deducted at the time of interest credit or at the end of the financial year, whichever is earlier. Banks usually credit interest on FDs quarterly or annually, and TDS is deducted based on the total interest credited:

Quarterly or Annual Interest Payment: If the bank pays interest quarterly, TDS will be deducted every quarter if the interest exceeds the threshold. For annual interest payments, TDS will be deducted at the end of the financial year or at the time of interest payment, aligning with the exemption limit being exceeded.

At Maturity: For FDs where interest is compounded and paid at maturity, TDS will be deducted annually on the accrued interest, even though the depositor has not physically received the interest. The final deduction for FD interest occurs at maturity if the accumulated interest exceeds the threshold.

Form 15G and Form 15H are declarations that prevent banks from deducting tax at Source (TDS) on interest income under certain conditions, as per the Income Tax Act, 1961. These forms are crucial for individuals seeking exemption from TDS on their investment income, such as interest from Fixed Deposits (FDs), saving accounts, and other income from corporate bonds.

Form 15G

Eligibility:

Individual taxpayers or Hindu Undivided Families (HUFs) who are residents of India.
The individual's age must be less than 60 years.

Conditions:

Total annual income must be below the taxable limit.
The total interest income for the year is within the threshold limit that is not subject to tax.
The individual must hold a valid Permanent Account Number (PAN).

Form 15H

Eligibility:

Available to individual taxpayers who are residents of India and aged 60 years or above (senior citizens).

Conditions:

The total tax calculated on the individual's total income for the fiscal year should be nil.
The individual must hold a valid Permanent Account Number (PAN).

Below are a few tips that can help you save tax on FD interest:

• Open FDs across multiple banks and NBFCs. Ensure your FD interest with each bank stays below the threshold.
• Invest in FDs that qualify for tax benefits under Section 80C
• Spread investments among family members with lower income

Apart from the tips mentioned above, investing in a medical insurance plan can also help you save tax. Section 80D of the Income Tax Act provides a deduction for individuals on the premiums paid towards a health plan. This benefit allows for a reduction in taxable income up to a specific limit of ₹25,000 for regular individuals and ₹50,000 for senior citizens aged 60 years or older.

With TATA AIG, you can buy health insurance coverage starting from just ₹15/ day. With this, you also have the flexibility to purchase insurance online, making it convenient to complete with just a few clicks. You can compare and buy the best health insurance policy that suits your unique needs.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions, and exclusions mentioned in your policy wording. Please go through the documents carefully.