FDs are a popular saving option, but they are not tax-efficient. The interest income is added to our income, and 10% TDS is applicable for income above Rs. 40,000 ( ₹ 50,000 for senior citizens). However, there are a few ways to reduce your tax liability.
Fixed Deposits are an attractive investment option for people who want a steady source of income and can’t handle the vagaries of the market.
However, fixed deposits come with their own set of problems. For instance, the interest received on FDs is subject to tax.
First, the interest received on your FDs is added to your income, and it is taxed as per your income slab. So, that means that if you fall in the 30% tax bracket, the interest income will be subjected to 30% tax.
For instance, if you have a total income of ₹ 20 lakhs per annum and your interest from FDs is ₹ 1 lakh. In this scenario, you have to pay ₹30,000 as taxes.
Moreover, if you are below 60, the interest income above ₹ 40,000 will be subjected to an additional 10% Tax Deducted at Source (TDS). So, in the above example, TDS will be applicable on the entire ₹ 1 lakh, i.e. ₹ 10,000 will be deducted as TDS.
So, if you fall in the highest tax bracket, putting money in FDs can severely dent your savings goals.
However, a few ways can help you save tax on interest income from FDs.
Submit Form 15G/15H
Did you know you don’t have to pay TDS on your interest income if your total income falls under the taxable limit? If your taxable income is less than ₹ 2.5 lakhs, you can submit form 15G/H to your bank. Form 15G is applicable to individuals below 60 years, and Form 15H for senior citizens. You need to submit this form before a new financial year starts so that the bank doesn’t deduct any TDS. However, you can also submit the form before a new quarter.
Claim refund through ITR
Don’t worry if you didn’t submit the form 15G/H. You can file the Income Tax Return (ITR) and get the money deducted as TDS to your bank account if your income doesn’t exceed the taxable limit.
Time your FD
A little planning will go a long way in saving tax. The applicable TDS is calculated in the month of March. So, you can book your FDs in such a way that will prevent you from earning an interest income of ₹ 40,000 in one financial year.
You can strategically book a one-year deposit in the middle of the year, such as September. In this scenario, the interest income will be split into two, and you might avoid TDS.
Book FDs in the name of your family members
This seems like an absolute no-brainer. Many people book FDs in the name of family members who don’t fall under the tax bracket, such as homemakers and elderly parents. As the TDS is charged on an individual level, spreading your total investable amount amongst your family members can reduce your tax liability.
Let us consider that you have ₹ 5 lakhs to invest in FDs. The first approach would be to book the entire amount under your name at the prevailing interest rate, say 9%. In this case, the total interest will be ₹46,542. As it is above Rs.40,000, then 10% TDS, i.e., 4654, will be charged.
However, if you spread the amount among your family members, the interest income will come down. For instance, if you deposited ₹ 2 lakhs in your mother’s name, then she will earn ₹18,617 as interest, and on the remaining amount, you will receive an interest of ₹27,925.
Both the interest income generated is below the threshold limit of ₹40,000. However, if you book an FD in your wife’s name, Clubbing of income might become applicable. In that case, the interest earned on the FD will be deemed your income, and the applicable tax slab will apply. It would be best to consult a CA or a tax professional before taking such measures.
Open FDs in different banks
This is one of the easiest things you can do to reduce your tax liability. You can book multiple FDs with different banks instead of booking a single FD in one bank. This will ensure that the interest income doesn’t exceed ₹ 40,000 in a financial year, and as a result, your bank will not deduct TDS.
Book FDs with shorter tenures
When you opt for FDs with a shorter timeline, the total interest you earn on that FD will be relatively less than a longer-term FD. Hence, if shorter-term FDs fit your requirements, you can look at booking short-term FDs to keep your interest income below the threshold limit.
In this article, we have seen some ways to help you save tax on your FD investments to benefit from the stable nature of FDs.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.