How Bank Fixed Deposits affect your taxes

6 MinsMay 18, 2022

A bank Fixed Deposit, also known as a Term Deposit, has always been a preferred investment avenue. It is common for investors across age, income groups, and risk profiles, to hold a portion of their investments in Fixed Deposits

This is because FDs earn secured and steady returns (providing a sense of financial security), offer enough liquidity (if tenure and plan are thoughtfully chosen), address contingency needs, help save for financial goals, and even help save tax. 

How Bank Fixed Deposits affect your taxes

How FD helps in tax saving

  • Investment in a 5-year Tax-saver FD is eligible for a deduction of up to Rs 1.5 lakh (from the Gross Total Income) as per the provisions of Section 80C of the Income Tax Act, 1961.  
  • The interest rate on a 5-year tax-saver FD is the same as that on a regular fixed deposit with a bank. 
  • It cannot be prematurely encashed/liquidated/withdrawn before the completion of the lock-in period. But this lock-in (of 5 years) is a good way to compound wealth.
  • To manage your liquidity needs, it is recommended that you choose between the reinvestment (cumulative) plan or pay-out plan (monthly, quarterly or half-yearly) thoughtfully.

How interest on FD is calculated
Keep in mind interest earned on long-term bank fixed deposits is compounded quarterly i.e. interest earned during the previous quarter is added to the principal for calculation of interest. Whereas if it is a short-term deposit of fewer than 6 months, the interest is calculated at simple interest and is considered based on the number of days. Axis Bank’s Fixed Deposit calculator is helpful here!

How interest on FD is taxed
That being said, be aware that the interest earned on bank FD ––whether it is a regular deposit or 5-year tax-saver deposit –––is taxable.

As per the prevailing tax rules, the interest earned on your bank FDs is taxable. The tax rate applicable will be as per your Income-tax slab.

Initially, the bank (payer) deducts the tax at the source while crediting interest to your account. The rate of Tax Deduction at Source (TDS) is 10% if PAN is furnished, and if not, TDS is 20%. No surcharge or cess is levied over and above this basic rate. 

TDS for interest earned on the tax-saver bank FD is deducted based on the total interest projected on the aggregate of your bank FD for the financial year.

[Also ReadBuild a corpus through Fixed Deposit laddering]

Documents to avoid TDS
If you are less than 60 years of age and your total annual income from all sources is less than Rs 2.5 lakh, then even if your interest income exceeds Rs 40,000, you can avoid TDS by submitting Form 15G to the bank during the financial year.

Likewise, for a senior citizen with a total income of less than Rs 3 lakh, even if your interest income exceeds Rs 50,000, TDS can be avoided by submitting Form 15H to the bank for the financial year.

Note that, if the bank has deducted TDS on the FD, it will be adjusted against your final tax liability when you file your Income Tax Return.

To make the most of your bank FD, choose the tenure and plan thoughtfully, plus avoid premature withdrawal as it would hinder the compounding process. If you follow an FD laddering strategy, it will address your liquidity needs, average out interest rate fluctuations, and potentially earn higher interest along with the safety of your capital.

So, open your bank FD today! You can open a Digital Fixed Deposit as well sitting in the comfort of your home, office, café, resort, or wherever you are. Axis Bank offers competitive interest rates on bank FDs for both long- and short-term investments. All you require to follow is a sensible approach that adds to your financial wellbeing. 

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision