Income Tax on Fixed Deposits: How Much Will You Pay?

Fixed Deposits (FDs) have long been one of the most preferred investment options in India. Known for their safety, assured returns, and simplicity, FDs attract a large number of conservative investors. But while fixed deposits offer guaranteed interest income, they are not tax-free. Many investors overlook how income tax on fixed deposits can affect their actual returns.

In this blog, we’ll break down how income from FDs is taxed, how much tax you might need to pay, and what steps you can take to reduce your tax liability legally.

What Is a Fixed Deposit?

A Fixed Deposit is a financial instrument offered by banks and Non-Banking Financial Companies (NBFCs) where you deposit a lump sum amount for a fixed tenure at a predetermined interest rate. At maturity, you receive the principal along with the interest earned.

FDs are known for their safety, making them a popular choice for risk-averse investors. However, the income tax on fixed deposits can sometimes reduce the attractiveness of these investments, especially in higher tax brackets.

Is Interest on Fixed Deposits Taxable?

Yes, the interest earned on fixed deposits is fully taxable under the head “Income from Other Sources.” This means the entire interest amount you earn in a financial year from your FDs is added to your total income and taxed as per your applicable income tax slab.

If your annual FD interest exceeds the specified limit, banks are required to deduct Tax Deducted at Source (TDS) before crediting the interest to your account.

TDS on Fixed Deposits: When and How Much?

As per current rules (FY 2025-26):

• If the total FD interest in a financial year exceeds ₹40,000 (₹50,000 for senior citizens), the bank will deduct TDS at 10%.

• If you do not provide your PAN, TDS is deducted at 20%.

• This is just a deduction — your final tax liability may be higher or lower depending on your tax slab.

• TDS is deducted on interest earned, not on the principal amount.

This is where many people get confused. Even if TDS has been deducted, you may still have to pay additional tax if you’re in a higher slab — or claim a refund if your total tax liability is lower.

Example: Tax Calculation on FD Interest

Let’s say Mr. Sharma, aged 40, earns ₹60,000 interest in a year from his fixed deposits.

• Since the interest exceeds ₹40,000, TDS @10% = ₹6,000 will be deducted.

• However, Mr. Sharma falls under the 30% tax bracket.

• Total tax due on FD interest = ₹18,000 (30% of ₹60,000)

• TDS already paid = ₹6,000

• Additional tax payable = ₹12,000

Thus, despite the TDS, Mr. Sharma must pay an extra ₹12,000 as income tax on fixed deposits.

How to Check TDS on Your FDs?

Banks generally issue Form 16A (TDS certificate), and you can also check TDS details in your Form 26AS on the income tax e-filing portal. It’s essential to match your FD interest income with what is reported by banks.

This ensures you file your returns correctly and avoid notices from the Income Tax Department.

Can You Avoid or Reduce TDS?

If your total income is below the taxable limit, you can avoid TDS on FD interest by submitting:

• Form 15G (for individuals below 60 years)

• Form 15H (for senior citizens above 60 years)

These forms are declarations that your income is below the threshold and you do not have any tax liability. Submit these forms at the beginning of the financial year to each bank where you hold FDs.

Note: Filing Form 15G/H falsely, when you do have taxable income, can attract penalties.

Are Tax-Saving Fixed Deposits Exempt?

There’s a special category of FD known as Tax-Saving Fixed Deposit, which qualifies for deduction under Section 80C of the Income Tax Act.

Here are the key points:

• Tenure: Minimum 5 years

• Maximum deductible investment: ₹1.5 lakh per year under Section 80C

• Only the principal amount is eligible for deduction

• The interest earned is still taxable

• Premature withdrawals are not allowed

Thus, while tax-saving FDs can help in reducing taxable income under Section 80C, they do not exempt you from income tax on fixed deposits entirely.

FD Taxation for Senior Citizens

Senior citizens enjoy a few benefits when it comes to FD taxation:

• TDS threshold is ₹50,000 instead of ₹40,000

• They can claim deduction of up to ₹50,000 on FD interest under Section 80TTB

This means, if a senior citizen earns ₹60,000 from FDs, they can claim ₹50,000 as a deduction and only ₹10,000 will be taxed.

This provision helps reduce the burden of income tax on fixed deposits for retirees relying on interest income.

How to Minimize Tax on FD Returns?

If you want to reduce your tax burden legally, here are a few strategies:

1. Split FDs across family members: Invest in the name of spouse or parents who fall in a lower tax bracket.

2. Distribute deposits across banks: Helps keep the interest below the TDS threshold at each bank.

3. Opt for cumulative FDs: Interest is paid at maturity; timing of taxability can be managed.

4. Submit Form 15G/15H: If applicable, to avoid TDS deduction.

5. Explore alternate instruments: Such as debt mutual funds or PPF that may offer more tax efficiency.

Remember, none of these methods will exempt the income tax on fixed deposits — they just help in reducing or delaying the tax outgo.

Should You Still Invest in FDs?

Despite the taxation, fixed deposits remain a good option for:

• Emergency funds

• Capital preservation

• Risk-free returns

• Senior citizens looking for steady income

However, if you are in a higher tax slab, it might be better to compare post-tax returns from FDs with other options like debt funds, bonds, or tax-free instruments before investing.

Final Words

Understanding income tax on fixed deposits is crucial to make an informed financial decision. Many investors get swayed by high FD interest rates without calculating how much of that return will be eaten up by taxes. By knowing how and when FD interest is taxed, and taking advantage of available deductions and declarations, you can optimize your net returns.