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How to avail Income Tax benefits and avoid TDS on Fixed Deposits

A fixed deposit (FD) is a financial instrument provided by banks or Non-Banking Financial Companies (NBFCs) on deposit of a lump sum amount at an agreed rate of interest and for a fixed period. FD investments provide a higher rate of interest compared to a savings account.

Normally, interest income from Fixed Deposits is fully taxable. Add it to your total income and get taxed at slab rates applicable to your total income.

You can see it under the head ‘Income from Other Sources’ in your Income Tax Return. This Tax is Deducted at Source by the bank at the time they credit the interest to your account, and not when the FD matures. So, if you have an FD for 3 years, banks shall deduct TDS at the end of each year.

However, here are a few ways so as to avail of income tax benefits and avoid TDS on FDs.


Tax Saving FDs

Tax saving fixed deposit is a type of fixed deposit under which you can invest and claim a tax deduction under section 80C of the Income Tax Act.

As per the current income tax laws, if an individual opts for an old/existing tax regime, then under Section 80C of the Income-tax Act, you can claim a deduction for investments up to Rs 1.5 lakh in a financial year by investing in tax-saving fixed deposits.

The amount so invested is to be deducted from gross total income to arrive at the net taxable income. This benefit is not available for someone who opts for the new tax regime. 

It is noteworthy that these deposits have a lock-in period of 5 years. Premature withdrawals and loans against these FDs are not allowed. 


Avail a loan against the FD

During a cash crunch or emergency, people tend to look for loans from a lot of sources. One of those sources can be getting loans against fixed deposits (FD) from banks.

This is a time-efficient way of getting a short-term loan. Instead of breaking the FD prematurely, depositors can easily apply for a loan against their FD with the bank.

Loan against FD (Fixed Deposit) is a type of secured loan where customers can pledge their fixed deposit as security and get a loan in return. The amount of loan depends on the FD deposit amount. This can go up to 90% – 95% of the deposit amount.

Lower interest rates compared to other types of loans like personal loans (0.5% – 2% above the applicable FD rate). No need to break FD and go for premature withdrawal thus suffering a loss of interest on FD.

No processing fees charged. Can be availed against domestic as well as NRI FDs. Can be repaid as a lump sum or in installment (not later than FD tenure)

A benefit to Senior Citizen

In her Budget speech, Finance Minister Nirmala Sitharaman declared that senior citizens above the age of 75 will not be necessary to file income tax returns if they receive an only pension and interest income.

That being said, if they have some other means of income, this benefit will not be applicable.

Submits Form 15G/15H

If the person submits Form 15G/15H, the bank after that will ensure that it does not make any TDS deduction on the interest income. Make FDs in Post Office Rather than Bank You can make a Fixed Deposit in the Post Office branch rather than a bank. No TDS deducted on Post Office Fixed Deposits.


Make FDs in the name of a family member

You make an investment of Fixed Deposits in the name of family members such as spouses or parents. The tax on Fixed Deposit interest income is calculated for an individual and tax charged depends on the slab rate under which they fall.


For example, if Deepak wishes to make an investment of Rs 500,000 in Fixed Deposits, which gives an interest of 10%. Interest earned on the same will be Rs 50,000. TDS deducted on it is Rs 5000. If out of 500,000, you make an investment of Rs 90000 in your family member’s name, interest on Fixed Deposit comes to Rs 9000. This is below the threshold of Rs 10,000 and no TDS will be deducted. It can attract the clubbing provisions of the Income Tax Act, 1961 which is the income of your spouse or family members is clubbed with your income. 



Points to Remember

1. If the bank has made a TDS Deduction but the person is liable for a lower rate of tax, you can claim the amount as a refund by filing an Income Tax Return.

2. If the person falls under the higher income tax slab rates such as 20% or 30%, he or she needs to pay TDS in the form of a self-assessment tax.

3. The bank does the TDS calculation at the time when the interest is due for the deposit and not when they pay it. Tax is paid on the interest income on an annual basis and not at the time of Fixed Deposit.  If you want to calculate the FD maturity amount, then use the FD Calculator.

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