Fixed Deposits (FDs) are a popular investment option in India, known for their safety and
stable returns. One of the critical considerations for investors is understanding the tax
implications of their FD earnings. This comprehensive post will explore whether interest
earned on FD interests is taxable in India, the tax treatment of FD income, and strategies to
optimise tax on FD returns.
What is an FD?
An FD is a financial instrument offered by banks and financial institutions where investment
is made in lump sum amount for a specific period at a predetermined interest rate. The
investment is safe as the principal amount and interest earnings are fixed, providing a
Key Features of FDs
●Fixed Tenure: FDs have a predetermined lock-in period, ranging from a few days to
●Fixed Interest Rate: The interest rate remains constant throughout the tenure,
shielding investors from market fluctuations.
●No Liquidity until Maturity: Premature withdrawals may incur penalties, making FDs
suitable for individuals with stable financial planning.
Taxation of FD investments
Tax on Fixed Deposit (FD) is the taxation of the interest income earned from FD investments
in India. FDs are a popular investment option due to their safety, predictable returns, and
ease of access. However, investors must be aware of the tax implications of FD interest
earnings to plan their finances effectively.
Tax on FD Interest for Regular Individuals Interest earned from fixed deposits is taxable per
the individual’s income tax slab. The income is added to the individual’s total income and
taxed at applicable tax rates. The income is reported under the head of “Income from Other
Sources” under the Income Tax Act.
Tax on FD Interest for Senior Citizens For senior citizens (60 years or above), a specific
provision exists under the Income Tax Act, providing them with a higher threshold for tax
exemption on FD interest. Senior citizens can avail of a higher tax exemption, up to Rs.
50,000 per financial year, on interest income earned from deposits, including FDs. This
concession is under section 80TTB.
Tax Deducted at Source (TDS) on FD Interests Banks are responsible for deducting TDS at
the time of interest payment. The TDS threshold for regular individuals is Rs 40,000. If the
total interest income from all FDs in a financial year exceeds Rs 40,000, the bank deducts
TDS. For senior citizens, the TDS threshold is Rs. 50,000 on FD interest.
Strategies to Minimise Tax on FD Returns
Tax-Saving FDs – Tax-Saving FDs, also known as Tax-Saver FDs, offer investors the benefit of
tax deductions under Section 80C of the Income Tax Act. Investments made in these FDs
qualify for deductions of up to Rs 1.5 lakh from the investor’s taxable income. However, it’s
important to note that tax-saver FDs come with a lock-in period of five years, meaning
premature withdrawals are not allowed.
Splitting FD Investments Across Financial Years Investors can consider splitting their FD
investments across different financial years to keep the interest income below the TDS
threshold. By spreading investments, they can avoid TDS deductions on their FD returns. This
strategy is particularly helpful for individuals in lower tax brackets who wish to minimise tax
Investing in Senior Citizen FDs For individuals aged 60 years or above, investing in senior
citizen fixed deposits is a viable option to avail of higher tax exemptions on interest income.
The higher threshold of Rs 50,000 can help senior citizens reduce their taxable income and
enhance their overall returns.
Tax on FDs vs Other Investment Options
Comparison with Savings Accounts Interest earned on savings accounts is also taxable.
However, the interest rate on savings accounts is generally lower than that of FDs. FDs offer
better returns, making them more attractive for investors looking to grow their wealth.
Taxation on Equity Investments Compared to FDs, Investments in stocks or equity Mutual
Funds (MFs) have different tax treatment. Gains from equity investments held for more than
one year qualify as Long-Term Capital Gains (LTCG) and are tax-exempt up to Rs 1 lakh. Any
gains exceeding this limit are taxed at 10%. For gains made within a year, they are
considered Short-Term Capital Gains (STCG) and are taxed at 15%.
Impact of Inflation on FD Returns One must consider the impact of inflation while
calculating the real returns from fixed deposits. Inflation erodes the purchasing power of
money over time, and FDs may sometimes outpace inflation, leading to reduced actual
FDs are a popular investment choice due to their safety and predictable returns. However,
it’s essential to understand the taxation of FD interests in India to plan your investments
more efficiently. Interest earned on FDs is taxable as per the individual’s income tax slab, but
there are strategies to optimize tax on FD returns. Tax-Saver FDs, spreading investments
across financial years, and investing in senior citizen FDs are ways to minimise tax liabilities.
As with any investment decision, it’s advisable to consider your financial goals, risk
tolerance, and tax planning before choosing FDs as a part of your investment portfolio.