Understanding TDS on Fixed Deposits
Tax Deducted at Source (TDS) on Fixed Deposits (FDs) is a mechanism under the Income Tax Act, 1961, designed to collect tax at the point where interest income is generated. Here is a detailed guide on how much is deducted and the reasons behind it.
How much is deducted?
The amount of TDS deducted depends on the total interest income earned from all FDs within a single bank during a financial year, the depositor’s age, and whether they have provided their Permanent Account Number (PAN) and the same has been linked with Aadhar.
Current TDS Rates and Thresholds (FY 2025-26)
| Condition | Threshold Limit per Bank (Annual Interest) | TDS Rate (with PAN) | TDS Rate (without PAN/PAN-Aadhar not linked) |
| General Citizens (below 60 years) | ₹50,000 | 10% | 20% |
| Senior Citizens (60 years & above) | ₹1,00,000 | 10% | 20% |
| Non-Resident Indians (NRIs) | No specific threshold | 30% (+ surcharge and cess) | 30% (+ surcharge and cess) |
Note: The 20% TDS rate without a PAN/PAN-Aadhar not linked is a penal rate to ensure tax compliance.
No TDS was deducted on Interest payments made to specific institutions
Certain types of entities receiving interest payments are exempt from the TDS provisions under Section 194A of the Income Tax Act. These include:
- Banking companies
- Cooperative banks
- The Life Insurance Corporation of India (LIC)
- The Unit Trust of India (UTI)
- Other specified insurance companies and financial corporations.
Why is TDS Deducted?
The primary reasons for deducting TDS on FD interest are:
- Interest is fully taxable: All interest earned from FDs (except NRE and FCNR accounts for NRIs) is fully taxable and must be reported under “Income from Other Sources” in your ITR, even if no TDS was deducted.
- Early Tax Collection: TDS helps the government collect income tax in advance, ensuring a steady flow of tax revenue throughout the year rather than waiting until the end of the financial year.
- Minimizing Tax Evasion: By deducting TDS, the government creates a transparent & traceable records (reflected in your Form 26AS/AIS) that makes it harder for individuals to evade tax on their interest income.
- Ease of Payment: The bank automatically handles the deduction and remittance to the government, simplifying the tax payment process for the depositor.
- TDS is not the final tax: The TDS deducted is an advance payment of your total income tax liability. Your final tax is determined by your total annual income and applicable income tax slab rates. If the TDS deducted is more than your actual tax liability, you can claim a refund while filing your Income Tax Return (ITR).
- Use Forms 15G and 15H to avoid TDS: If your total taxable income for the financial year is below the basic exemption limit (e.g., ₹2.5 lakh under the old regime for general citizens, ₹3 lakh for senior citizens), you can submit Form 15G (for individuals under 60) or Form 15H (for senior citizens) to the bank to request non-deduction of TDS. These forms must be submitted to each bank at the beginning of every financial year.
- Monitor across banks: The TDS threshold applies per bank or financial institution. If you have FDs across multiple banks, each bank assesses the interest from deposits within that single institution.
- Tax-Saving FDs: Investing in a 5-year lock-in tax-saving FD allows for a deduction on the principal amount invested (up to ₹1.5 lakh under Section 80C), but the interest earned is still subject to TDS and is taxable.
Conclusion
TDS on FD interest is a robust system designed to streamline tax collection for the government. While it might feel like an early bite out of your returns, it is essentially a mandatory, advance contribution towards your final income tax obligation, ensuring a compliant and efficient tax ecosystem for the nation.
