Tax on FD Interest: How TDS Works and How to Save Legally

You put Rs 10 lakh in a bank FD at 7.5%. You expect Rs 75,000 as interest at the end of the year. But when you check your account, only Rs 67,500 shows up. Where did Rs 7,500 go?

TDS. Tax Deducted at Source.

The bank quietly cut 10% of your interest and sent it to the government. And here is the thing -- this is not even your final tax. Depending on your income slab, you might owe more. Or you might be eligible for a refund.

Most FD holders in India do not fully understand how FD interest is taxed. They either overpay tax or miss out on completely legal ways to reduce it. This guide fixes that. We will cover the exact TDS rules, who qualifies for Form 15G/15H, and five strategies that can genuinely reduce your tax burden on fixed deposit interest.

Let us get into it.

How FD Interest Is Taxed in India

This is the most misunderstood part. Many people think FD interest is taxed at a flat 10%. It is not.

Here is how it actually works:

FD interest is added to your total income and taxed at your income tax slab rate.

So if you earn Rs 12 lakh from your salary and Rs 75,000 from FD interest, your total taxable income becomes Rs 12,75,000. The FD interest gets taxed at whatever slab that falls into -- not at a flat rate.

Under the new tax regime (FY 2025-26), the slabs look like this:

Under the old tax regime (if you still opt for it):

The key point: if you are in the 30% slab, your FD interest is effectively taxed at 30% (plus cess). That Rs 75,000 interest? You keep only about Rs 52,500 after tax. The bank only deducted Rs 7,500 as TDS (10%), but you still owe the remaining Rs 15,000+ when you file your ITR.

This is why people get surprised with "tax due" notices -- the TDS was just an advance payment, not the full tax.

Important: FD interest is taxable in the year it is accrued, not when the FD matures. If you have a 5-year FD, the bank calculates interest each year and you owe tax on it each year -- even if the money has not hit your account yet. This is called taxation on an accrual basis.

TDS on FD: The Rules You Must Know

TDS is not the tax itself. Think of it as a prepayment. The bank deducts a portion of your interest and deposits it with the government on your behalf. You get credit for this TDS when you file your income tax return.

Here are the exact rules for FY 2025-26:

The Threshold

• General public: TDS kicks in when total FD interest from a single bank exceeds Rs 40,000 in a financial year
• Senior citizens (60+): The threshold is higher at Rs 50,000 per financial year

Below these limits, no TDS is deducted. Your interest hits your account in full.

The Rate

• With PAN linked: 10% TDS
• Without PAN (or PAN not linked to account): 20% TDS

This is a big one. If your PAN is not linked to your bank account, the bank will deduct 20% instead of 10%. That is double. Make sure your PAN is updated with every bank where you hold FDs.

Per Bank, Not Per FD

This catches many people off guard. The Rs 40,000 limit applies to your total interest across all FDs in one bank -- not per FD.

So if you have three FDs in SBI earning Rs 15,000 each (total Rs 45,000), TDS will be deducted because the combined interest exceeds Rs 40,000. It does not matter that each individual FD is below the limit.

When Is TDS Deducted?

Banks typically deduct TDS at the end of each financial year (March 31) or when the FD matures -- whichever comes first. For cumulative FDs where interest is not paid out periodically, TDS is still deducted on the accrued interest each year.

Post Office FDs: Different Rules

Here is something most guides miss: Post office term deposits (including the popular 5-year POTD under Section 80C) are also subject to TDS. The rules are the same -- Rs 40,000 threshold for general public, Rs 50,000 for senior citizens. However, post office FDs of 1-3 year tenures are taxable at slab rate but the 5-year deposit gives you the additional benefit of Section 80C deduction.

When TDS Is Deducted vs. When Tax Is Actually Due

This is where most confusion happens. Let us clear it up with an example.

Scenario: Ravi earns Rs 14 lakh from salary and Rs 60,000 from FD interest. He is in the 15% slab under the new regime.

Ravi thought he was done because the bank already deducted TDS. But he still owes Rs 3,000 more because his slab rate (15%) is higher than the TDS rate (10%).

The reverse can also happen. If your total income (including FD interest) falls below the basic exemption limit, you owe zero tax. But the bank already deducted TDS. In that case, you file your ITR and claim a refund.

Three possible outcomes when you file your ITR:

1. TDS = Actual tax: You are in the 10% slab and nothing more is owed. Rare, but possible.
2. TDS < Actual tax: You need to pay the difference as self-assessment tax before filing. This is common for people in the 20-30% bracket.
3. TDS > Actual tax: You get a refund. This happens for senior citizens, homemakers, and students whose total income is below the taxable limit.

Pro tip: If you expect to owe more than Rs 10,000 in tax beyond TDS, you should pay advance tax in quarterly instalments. Otherwise, you may face interest under Section 234B and 234C.

Form 15G and 15H: The Legal Way to Avoid TDS Entirely

This is the single most useful thing in this entire article. If you qualify, you can legally tell the bank: "Do not deduct any TDS from my FD interest." And the bank has to listen.

What Are These Forms?

• Form 15G: For individuals below 60 years of age whose total income is below the basic exemption limit
• Form 15H: For senior citizens (60 and above) whose final tax liability for the year is nil

When you submit these forms to your bank, the bank will not deduct TDS on your FD interest for that financial year.

Who Qualifies for Form 15G?

You must meet ALL of these conditions:

1. You are an individual (not a company or firm)
2. You are a resident Indian
3. You are below 60 years of age
4. Your total estimated income for the year (including FD interest) is below the basic exemption limit -- Rs 4,00,000 under the new regime or Rs 2,50,000 under the old regime
5. The total interest from all FDs in that bank does not exceed the basic exemption limit

In practice, Form 15G is most useful for:

• Homemakers with no other income
• Students who have FDs from savings or gifts
• People between jobs with no salary income that year
• Individuals whose only income is FD interest below Rs 4 lakh

Who Qualifies for Form 15H?

Form 15H is simpler. You need to meet these conditions:

1. You are 60 years or older
2. You are a resident Indian
3. Your estimated tax liability for the year is nil (after all deductions and exemptions)

Note the subtle difference: Form 15G asks if your income is below the exemption limit. Form 15H asks if your final tax liability is zero. A senior citizen could have income above Rs 4 lakh but still have zero tax liability after claiming deductions like 80C, 80D, and the crucial 80TTB (Rs 50,000 deduction on interest income).

How to Submit

1. Online: Most banks now allow you to submit Form 15G/15H through net banking or the mobile app. SBI, HDFC, ICICI, and most major banks support this.
2. Offline: Download the form from your bank's website or the Income Tax department site. Fill it out, sign it, and submit at your branch.
3. Timing: Submit at the start of each financial year (April). If you submit late, TDS already deducted before your submission will not be reversed -- you will need to claim it as a refund when filing ITR.

You must submit Form 15G/15H every year. It is not a one-time thing. Each April, submit fresh forms to every bank where you hold FDs.

What Happens If You Submit Incorrectly?

If you submit Form 15G/15H but your income actually exceeds the limit, you could face penalties under the Income Tax Act. The bank reports these forms to the IT department, so this is not something you can game. Be honest about your income estimates.

5 Legal Strategies to Reduce Tax on FD Interest

Beyond Form 15G/15H, here are five genuinely effective strategies:

Strategy 1: Split FDs Across Family Members

If you are in the 30% tax bracket but your spouse or parent has little or no income, consider this approach:

• Gift money to your spouse, adult children, or parents
• They open FDs in their own name
• The interest is taxed in their hands at their (lower) slab rate

Important caveat: Under clubbing provisions (Section 64), income from money gifted to your spouse or minor children gets added back to your income. However:

• Money gifted to parents is not subject to clubbing
• Money gifted to adult children (18+) is not subject to clubbing
• Income earned by your spouse from money she/he earned independently is not clubbed

So if your retired parents are in a lower slab, gifting them money for FDs is a perfectly legal strategy. Use our FD calculator to see the post-tax difference.

Strategy 2: Spread FDs Across Multiple Banks

Remember, the Rs 40,000 TDS threshold is per bank. If you have Rs 10 lakh to invest in FDs:

This does not reduce your actual tax liability. You still need to declare all FD interest in your ITR and pay tax at your slab rate. But it avoids the TDS deduction, which means your money stays invested longer and earns more interest.

This strategy is especially useful if your total income is below the taxable limit and you just want to avoid the hassle of claiming TDS refunds.

Check the best FD rates across banks to find the right combination.

Strategy 3: Invest in a 5-Year Tax Saver FD (Section 80C)

A 5-year tax saver FD gives you a deduction of up to Rs 1,50,000 under Section 80C of the old tax regime. This means:

• The amount you invest (up to Rs 1.5 lakh) is deductible from your taxable income
• If you are in the 30% bracket, this saves you Rs 46,800 in tax (Rs 1,50,000 x 30% + 4% cess)

But note these limitations:

• The interest earned on a tax saver FD is still fully taxable -- only the principal qualifies for 80C
• There is a 5-year lock-in -- you cannot withdraw early
• This benefit is only available under the old tax regime. The new regime does not allow 80C deductions (except for NPS under 80CCD(2))
• Compare this with other 80C options like ELSS mutual funds which have only a 3-year lock-in and potentially higher returns

Strategy 4: Claim the 80TTB Deduction (Senior Citizens Only)

If you are 60 years or older, Section 80TTB is your best friend. It allows a deduction of up to Rs 50,000 on interest income from:

• Fixed deposits
• Savings accounts
• Post office deposits
• Recurring deposits

This is available under the old tax regime only.

So a senior citizen earning Rs 50,000 in FD interest can claim the entire amount as a deduction and pay zero tax on it. Combined with the higher TDS threshold of Rs 50,000 and Form 15H, senior citizens have strong tools to minimize FD tax. Use our Senior Citizen FD Calculator to see your actual post-tax returns.

Note for non-seniors: Section 80TTA provides a similar but smaller deduction -- Rs 10,000 on savings account interest only. FD interest is not covered under 80TTA.

Strategy 5: Time Your FD Maturity Smartly

Since FD interest is taxed on an accrual basis, the timing of your FD can make a difference:

• If you expect to be in a lower tax slab next year (say, you are retiring mid-year), consider booking shorter-term FDs that mature in the year when your income is lower
• For cumulative FDs, remember that interest accrues every year even if you do not receive it. A 5-year cumulative FD does not mean all interest is taxed in year 5 -- it is spread across all five years
• If you are close to the Rs 40,000 TDS threshold, a shorter FD that matures before crossing the limit can help you avoid TDS in that year

How to Report FD Interest in Your Income Tax Return

When filing your ITR, FD interest goes under "Income from Other Sources" (Schedule OS). Here is the step-by-step:

Step 1: Gather Your Interest Certificates

Every bank issues an interest certificate (also called a TDS certificate) for the financial year. You can usually download this from net banking. It shows:

• Total interest earned
• TDS deducted
• Your PAN

Step 2: Check Form 26AS / AIS

Log into the Income Tax e-filing portal and check your Form 26AS and Annual Information Statement (AIS). These show all TDS deducted by banks against your PAN. Make sure the amounts match your bank certificates.

If there is a mismatch, contact your bank. Common reasons: PAN not linked, or the bank reported interest under a different assessment year.

Step 3: Declare All FD Interest

In your ITR, declare FD interest under "Income from Other Sources." You must report interest from every bank and every FD -- even if no TDS was deducted (because the amount was below Rs 40,000 or you submitted Form 15G/15H).

Not declaring FD interest is a common mistake. The Income Tax department has access to your bank data through AIS. If they find undeclared interest, you will get a notice under Section 143(1) and may face penalties.

Step 4: Claim TDS Credit

The TDS already deducted by your bank is your credit. When you file your ITR, the system automatically picks up TDS from 26AS and adjusts it against your total tax liability. If TDS exceeds your tax, you get a refund.

What If You Forgot to Declare FD Interest in Past Years?

If you missed declaring FD interest in a previous year's ITR:

1. You can file an updated return (ITR-U) within 24 months of the end of the relevant assessment year
2. You will need to pay any additional tax plus a 25% penalty (if filed within 12 months) or 50% penalty (if filed between 12-24 months)
3. It is always better to file a revised/updated return than to wait for a notice

Tax Comparison: FD vs. Other Investment Options

FD interest is taxed at your full slab rate, which makes it one of the least tax-efficient investment options. Here is how it compares:

The takeaway: if you are in the 20-30% tax bracket, every Rs 1 lakh in FD interest loses Rs 20,000-30,000 to tax. PPF gives you similar safety with zero tax. SCSS is better for seniors. And equity mutual funds, while riskier, are far more tax-efficient for long-term goals.

That said, FDs have their place. They offer guaranteed returns, high liquidity (no lock-in for regular FDs), and are simple to understand. The goal is not to avoid FDs entirely -- it is to be smart about how much you keep in FDs versus other options.

Read our full comparison: Best Fixed Deposit Rates in India 2026

Senior Citizens: Special Tax Rules You Should Know

Senior citizens get several advantages when it comes to FD taxation. Here is a complete picture:

1. Higher TDS Threshold: Rs 50,000

While the general limit is Rs 40,000, senior citizens get a Rs 50,000 threshold before TDS is deducted. This means you can earn up to Rs 50,000 in FD interest from a single bank without any TDS.

2. Section 80TTB: Rs 50,000 Deduction on Interest Income

Under the old tax regime, senior citizens can claim a deduction of up to Rs 50,000 on interest income from banks, post offices, and cooperative societies. This covers FD interest, savings account interest, and RD interest combined.

If your total interest income is Rs 50,000 or less, your tax on interest is effectively zero.

3. Form 15H: Easier to Qualify

Senior citizens submit Form 15H (not 15G). The qualification is simpler -- your estimated tax liability for the year must be nil. Thanks to the higher basic exemption limit and Section 80TTB, many senior citizens with moderate FD portfolios will qualify.

Example: A 65-year-old with Rs 3,00,000 in pension income and Rs 2,00,000 in FD interest (total Rs 5,00,000). Under the old regime, after standard deduction of Rs 50,000 and 80TTB deduction of Rs 50,000, taxable income is Rs 4,00,000 -- which is above Rs 3,00,000 (old regime exemption for seniors) but the tax works out to just Rs 5,000 before rebate. With Section 87A rebate (up to Rs 12,500), the final tax liability is nil. This person qualifies for Form 15H.

4. SCSS and PMVVY: Better Rates

Senior citizens have access to two government-backed options that often beat regular FD rates:

• Senior Citizens Savings Scheme (SCSS): Currently 8.2% -- higher than most bank FDs. Max investment Rs 30 lakh. Quarterly payouts. Section 80C benefit on investment.
• Pradhan Mantri Vaya Vandana Yojana (PMVVY): 7.4% for the current series. Monthly/quarterly/annual payout options.

Both are taxable at slab rate, but 80TTB applies to the interest. For many seniors, combining SCSS + a few bank FDs keeps total interest under Rs 50,000 (80TTB deduction), resulting in zero tax.

5. The Super Senior Citizen Edge (80+)

Super senior citizens (80 years and above) have an even higher basic exemption limit of Rs 5,00,000 under the old regime. This means they can earn more before any tax kicks in.

Use our Senior Citizen FD Calculator to model different scenarios for your parents or grandparents.

Frequently Asked Questions

1. Is TDS on FD the final tax I need to pay?

No. TDS is just an advance payment towards your total tax liability. Your actual tax on FD interest depends on your income tax slab. If your slab rate is higher than 10%, you will need to pay additional tax when filing ITR. If your total income is below the taxable limit, you can claim a TDS refund.

2. Can I submit Form 15G if I have salary income?

Only if your total income (salary + FD interest + all other income) is below the basic exemption limit (Rs 4 lakh under new regime, Rs 2.5 lakh under old regime). If you are a salaried person earning above this, you do not qualify for Form 15G. However, a non-working spouse or retired parent with income below the limit can submit it for FDs in their name.

3. What happens if I do not submit Form 15G/15H on time?

The bank will deduct TDS as usual. You cannot get the TDS reversed by submitting the form later in the year -- it only applies to interest accrued after submission. However, you can claim the TDS as a credit/refund when you file your ITR.

4. Is FD interest from different banks combined for TDS calculation?

No. TDS is calculated separately for each bank. If you earn Rs 30,000 interest each from three different banks (total Rs 90,000), no bank will deduct TDS because each individual bank's interest is below Rs 40,000. However, you must still declare the full Rs 90,000 in your ITR and pay tax at your slab rate.

5. Do NRIs have different TDS rules for FD interest?

Yes. For NRIs, TDS on FD interest is deducted at 30% (plus surcharge and cess), regardless of the amount. There is no Rs 40,000 threshold for NRIs. NRIs also cannot submit Form 15G/15H. However, NRIs can claim benefits under the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence to reduce or avoid double taxation.

The Bottom Line

FD interest taxation is not complicated once you understand the basics. Here is the short version:

1. FD interest is taxed at your slab rate -- not at a flat 10%
2. TDS (10%) is just an advance payment, not the final tax
3. If your income is below the taxable limit, submit Form 15G (under 60) or Form 15H (60+) to avoid TDS entirely
4. Split FDs across banks and family members to optimize tax
5. Senior citizens should maximize 80TTB, SCSS, and Form 15H
6. Always declare all FD interest in your ITR -- the government already knows about it through AIS

The real question is not "how to avoid tax on FD interest" -- it is "should I rely on FDs for all my savings?" For most people in the 20-30% bracket, a mix of PPF (tax-free), equity mutual funds (tax-efficient), and FDs (for short-term needs) will give you significantly better after-tax returns.

Start by checking the latest FD rates, run the numbers on our FD Calculator, and make an informed choice.