Fixed Deposits (FDs) are one of the most popular investment instruments in India due to their safety, assured returns, and simplicity. However, the interest earned from FDs is taxable, and to ensure compliance, banks deduct Tax Deducted at Source (TDS) on the interest income. Investors often wonder how TDS is applied to FD interest and what guidelines govern the deduction.
This article delves into the details of TDS on FD interest, explaining applicable rules, calculations, and factors that determine the TDS liability. It also highlights recent changes in TDS limits introduced in Budget 2025.
What Is TDS on FD Interest?
Tax Deducted at Source (TDS) is a preemptive tax deduction applied by banks on income earned by depositors, such as FD interest, before the interest amount is credited to their accounts. Under Section 194A of the Income Tax Act, banks are mandated to deduct TDS if the aggregate FD interest earned in a financial year exceeds a specified exemption limit.
Key Limitations for TDS Applicability:
– If the interest earned on FDs across all accounts with a bank exceeds ₹40,000 for regular depositors and ₹50,000 for senior citizens, banks deduct TDS.
– Post deduction, banks remit this tax to the government on behalf of the depositor. This deducted amount appears in the depositor’s Form 26AS online tax statement, which can be claimed during annual income tax filing.
How Is TDS Applied on FD Interest?
Current TDS Rates:
– Banks deduct 10% TDS on FD interest if a depositor’s PAN number is available.
– If PAN details are not provided, TDS is deducted at a higher rate of 20%.
Calculation Example:
Let’s assume you have an FD of ₹25 lakhs with a bank, earning an annual interest rate of 6.5%. Here’s how TDS would be calculated:
Step-by-Step Calculation:
1. FD Principal Amount: ₹25,00,000
2. Annual Interest Rate: 6.5%
3. Yearly Interest: ₹25,00,000 × 6.5% = ₹1,62,500
4. If PAN is provided, TDS applicable = ₹1,62,500 × 10% = ₹16,250
5. If PAN is not provided, TDS applicable = ₹1,62,500 × 20% = ₹32,500
Banks will credit the remaining interest (₹1,46,250 with PAN or ₹1,30,000 without PAN) to your account after deducting the applicable TDS.
How Much TDS Will Be Deducted on ₹25 Lakh FD Interest Per Month?
For 25 lakh FD interest per month with monthly payouts, interest distribution changes slightly since a part of the principal earns interest each month.
Scenario: FD with Monthly Interest Payout
Suppose you have a ₹25 lakh FD at an annual interest rate of 6.5%, compounded monthly:
– Monthly Payout Interest: (₹25,00,000 × 6.5%) ÷ 12
= ₹13,541.67 (approx.)
– Annual Interest Cumulative:
₹13,541.67 × 12 = ₹1,62,500
If monthly payouts are received, banks deduct TDS based on cumulative interest. Whether distributed monthly or booked annually, total TDS deducted remains ₹16,250 (10%) or ₹32,500 (20%) depending on whether PAN is available.
Recent Changes in TDS Limits: Budget 2025 Update
To ease the tax burden on small depositors, introduced the following amendments:
1. Enhanced Exemption Limits:
– The TDS limit on FD interest was raised from ₹40,000 to ₹50,000 for regular depositors under section 194A.
– For senior citizens, the exemption limit moved from ₹50,000 to ₹60,000.
2. Scope for Larger Investments Without TDS Deductions:
With an increased threshold, depositors can now earn slightly higher FD interest without triggering TDS.
Impact on Investors
Under the new limits:
For depositors earning interest below ₹50,000 (regular depositors) or ₹60,000 (senior citizens) per annum, banks will no longer deduct TDS, providing a relief for medium-range investments. However, if cumulative FD interest exceeds these limits yearly, TDS deduction applies as before.
What Happens If TDS Is Deducted?
Depositors must report their FD interest income while filing taxes, regardless of whether or not TDS is deducted. If your overall taxable income falls under the zero tax slab rate, you can reclaim the TDS deducted by banks.
Filing Form 15G and 15H:
– Depositors falling below the taxable income limit can avoid TDS deductions by submitting Form 15G (for non-seniors) or Form 15H (for senior citizens) to their banks.
Tax Credit via Form 26AS:
When investors file tax returns, the TDS amount deducted by banks is adjusted against their total tax liability. If additional taxes have been paid, they can claim the excess amount back as refunds.
Factors Affecting TDS Deduction on FD Interest
1. Provision of PAN:
Higher TDS rates apply if PAN details are not provided to the bank.
2. Aggregate Interest Across Branches:
Even if FD accounts are held across multiple branches of the same bank, cumulative FD interest exceeding ₹40,000 (or ₹50,000 for senior citizens) triggers TDS.
3. Multiple Accounts Across Different Banks:
TDS limits apply separately for each bank unless disclosed during tax filing.
4. Interest Compounding Frequency:
Compounded monthly or quarterly interest adds variability to payouts but doesn’t change aggregate TDS liability.
Disclaimer
This article is meant for informational purposes only and should not be regarded as financial advice. Tax implications and TDS deductions vary based on individual financial profiles, interest compounding frequency, and applicable exemptions. Investors must thoroughly assess all pros and cons of investing in Fixed Deposits or navigating the Indian financial market. It is advisable to consult tax or financial advisors for accurate guidance.
Summary:
FD interest attracts TDS as per Indian Income Tax regulations. Banks deduct 10% TDS if PAN details are provided and 20% if PAN is absent. TDS applies only if the cumulative FD interest exceeds ₹40,000 (regular depositors) or ₹50,000 (senior citizens) annually. A ₹25 lakh FD earning 6.5% interest annually may incur a TDS of ₹16,250 (if PAN is available) or ₹32,500 (if PAN is not available). Budget 2025 raised TDS exemption limits to ₹50,000 for regular depositors and ₹60,000 for senior citizens, offering relief to smaller investors.
Deposit-holders can avoid TDS with forms like 15G/15H or reclaim the deducted amount when filing ITR, provided their taxable income stays below prescribed thresholds. While Fixed Deposits remain a secure investment avenue, understanding TDS implications is crucial for optimized earnings.
