Tax on FD Interest: How Interest on Fixed Deposit is Taxed

• Interest earned on a fixed deposit is taxable under Income from Other Sources. The TDS threshold only decides when the payer must deduct tax; it does not make the interest tax-free.
• From 1 April 2025, the bank, co-operative bank and post office TDS threshold is ₹50,000 for depositors other than resident senior citizens and ₹1,00,000 for resident senior citizens.
• TDS under Section 194A (now Section 393) is generally deducted at 10% when PAN is available. If PAN is not furnished, the rate can rise to 20%.
• A five-year tax-saving FD may qualify for a Section 80C (now Section 123) deduction on the amount deposited, but the interest remains fully taxable.

Fixed Deposits (FDs) are among the most underestimated investment tools for building financial stability. Along with keeping your money safe for the foreseeable future, FDs also help you grow your wealth substantially in the short and long run. Flexible tenures and a higher interest rate than that offered on savings accounts are among the many features that make FDs an excellent investment option.

However, the return shown on an FD certificate is a pre-tax return. The interest must be included in taxable income even where the bank has not deducted TDS. Understanding the difference between taxability and TDS is therefore essential before comparing FD returns.

• Fixed deposits are a top-rated investment tool that financial institutions offer to park your money.
• As the name suggests, you invest a fixed amount at a predetermined interest rate and tenure.
• Upon maturity, you reap the benefits of a lump sum plus the interest earned on that amount.
• Investing in an FD account offers the advantage of a higher interest rate than what you would get on a traditional savings account and higher returns than a recurring deposit account.
• They are also not as risky as other investments, compensating for their lower liquidity feature.
• An FD may pay interest periodically or accumulate it until maturity.
• For TDS purposes, choosing a cumulative FD does not automatically postpone deduction until maturity.
• Under Section 194A (now Section 393), the payer must generally deduct tax when the interest is credited or paid, whichever happens earlier.

Interest on a bank or post-office fixed deposit is normally reported under the head Income from Other Sources. The full taxable interest must be added to the taxpayer’s other income and taxed at the slab or applicable rate. There is no general exemption simply because the interest remains below the TDS threshold.

This distinction matters. A depositor may earn ₹35,000 of FD interest and face no bank TDS because the statutory threshold is not crossed, yet the ₹35,000 remains part of taxable income. Conversely, if TDS is deducted, that deduction is only a tax credit and not the final calculation of tax.

Tax is computed on the interest, not on the principal returned at maturity. The principal is the depositor’s own invested amount. The interest is the income generated by that investment.

Also Read: What is a Fixed Deposit (FD)?

TDS, or Tax Deducted at Source, is the tax deducted by an organisation or individual who pays another person. Income categories, such as salary, rent, commission, etc., are applicable for a TDS deduction if the amount exceeds a particular limit. However, you can adjust the deducted amount while filing your tax returns. You can claim a refund if your tax liability is lower than the deducted amount.

For resident depositors, a bank generally deducts TDS on FD interest under Section 194A (now Section 393) when the aggregate interest credited or paid during the financial year exceeds the applicable threshold. The deduction is made at the time of credit or payment, whichever occurs earlier.

The standard rate is 10% when a valid PAN is furnished. Where a PAN is not furnished, the higher-rate rule can result in a deduction at 20%.

Once the threshold is crossed, TDS is generally calculated on the entire interest amount, not merely on the portion above the threshold. For example, where the applicable threshold is ₹50,000, and the bank-wide interest is ₹55,000, the bank deducts TDS on ₹55,000, subject to the other conditions of Section 194A (now Section 393).

TDS can be checked in Form 26AS (now Form 168) and the Annual Information Statement. While filing the return, the taxpayer should reconcile the bank interest certificate, account statements, AIS and Form 26AS (now Form 168), then claim the available TDS credit.

Also Read: How to Calculate FD Interest?

Budget 2025 changed both relevant thresholds. The instruction that the ordinary depositor limit remained at ₹40,000 is not supported by the official Budget update. With effect from 1 April 2025, interest paid by a bank, co-operative bank or post office can remain free from TDS up to ₹50,000 for a payee other than a resident senior citizen. The corresponding threshold for a resident senior citizen increased from ₹50,000 to ₹1,00,000.

These are TDS thresholds, not tax exemptions. Interest below the threshold can still be taxable when the taxpayer’s total income creates a tax liability.

The threshold is based on the aggregate interest credited or paid by the relevant payer during the financial year. Where a banking company or co-operative bank uses Core Banking Solutions, the limit is not tested separately for each branch. Therefore, opening several FDs in different branches of the same CBS bank does not create a separate threshold for every FD or branch.

Keeping deposits with different banks may affect whether each bank independently has a TDS obligation, but it does not reduce the taxpayer’s total taxable FD interest. All taxable interest must still be combined in the income tax return.

Forms 15G and 15H (now consolidated under Form 121) are self-declarations for eligible resident taxpayers whose estimated tax liability is nil. They prevent eligible TDS deduction; they do not convert taxable FD interest into exempt income.

Under the rules applicable to declarations in Form 15G (now Form 121), the declarant must be a resident person other than a company or firm, the estimated tax on total income must be nil, and the aggregate specified income subject to TDS should not exceed the maximum amount not chargeable to tax.

A person should not submit Form 15G (now Form 121) merely because the bank interest is below the TDS threshold.

Form 15H is meant for a resident individual aged 60 years or more. The key condition is that the estimated tax payable on total income is nil. Unlike Form 15G (now Form 121), the declaration may be available to an eligible senior citizen even when the relevant interest exceeds the basic exemption amount, provided the final estimated tax is nil.

PAN must be furnished with the declaration. The form is best submitted to every relevant bank or payer before interest is credited, usually near the beginning of the financial year. Banks may accept it through internet banking or another electronic facility, although the available process depends on the bank.

The Income Tax Department’s latest official guidance states that Form 121 replaces Forms 15G and 15H under the Income Tax Act, 2025, for tax year 2026-27.

Form 121 keeps separate eligibility conditions for people below 60 and senior citizens aged 60 or more. It should ideally be submitted before income is credited or paid, preferably at the start of the tax year, and may be submitted electronically through the payer’s portal or physically.

Taxpayers should therefore use the declaration form applicable to the relevant year and the bank’s current process rather than relying on an old form saved earlier.

The resident threshold under Section 194A (now Section 393) does not govern taxable NRI deposit interest in the same manner. Taxable interest paid to a non-resident is generally covered by Section 195 (now Section 393), and the official TDS rate table lists 30% for “any other income”, with applicable surcharge and health and education cess. A lower treaty rate may be available where the relevant Double Taxation Avoidance Agreement applies, and the required documents are provided.

The tax result also depends on the account type. Interest credited to an NRE account is exempt, subject to the account holder continuing to satisfy the statutory conditions. Interest on an NRO account is taxable. Interest on qualifying foreign-currency deposits with a scheduled bank, including eligible FCNR deposits, is exempt for a non-resident or a resident but not ordinarily resident when specified conditions are met.

Therefore, the blanket statement “all NRI FDs suffer 30% TDS” is incomplete. NRO interest is generally taxable and subject to non-resident TDS rules, whereas qualifying NRE and FCNR interest may be exempt. Residential status, account type, treaty eligibility and supporting documents must be checked together.

Another option to save tax is to invest in a tax-saving fixed deposit, which has a lock-in period of five years.

Section 80C (now Section 123) of the Income Tax Act allows depositors to claim up to ₹ 1.5 lakhs per annum in a five-year tax-saving FD.

The deduction applies to the eligible amount deposited within the combined Section 80C (now Section 123) ceiling. It does not exempt the interest earned. Tax-saving FD interest continues to be reported as income from other sources and remains subject to the usual TDS rules.

The taxpayer must also check whether the Section 80C (now Section 123) deduction is available under the tax regime chosen; the default new tax regime permits only limited deductions compared with the old regime.

The statutory requirement is a fixed term of not less than five years with a scheduled bank under the notified scheme. Premature withdrawal is generally not available during the lock-in, so the depositor should keep emergency funds separate.

The phrase “tax-saving FD” can therefore be misleading when read without context: it refers to a deduction for the qualifying deposit, not tax-free maturity proceeds. The principal deduction and the taxability of interest are two different issues.

Important Factors to Know Before Investing in an FD

Before you choose to invest your money in a fixed deposit account, you must be aware of the minute details of the process. Here are a few essential rules to keep in mind when choosing to invest in an FD account.

Tax on FD

As mentioned earlier, the interest you earn on an FD qualifies as 'income from other sources' when filing your returns. Your total income plus the interest earned will determine your tax slab.

A depositor should compare the post-tax return rather than only the advertised interest rate. Someone in a higher slab may retain substantially less interest after income tax than a person with no final tax liability.

TDS Is Not the Final Tax

If the bank deducts 10% but the depositor’s applicable tax rate is higher, the balance tax may have to be paid through advance tax or self-assessment tax. If the final liability is lower than the TDS credit, the excess may be claimed as a refund through the return.

Joint FDs and Clubbing Rules

For a joint FD, the source of funds and the clubbing provisions must be examined. Where a person transfers money to a spouse without adequate consideration, and the spouse invests it in an interest-bearing asset, Section 64(1)(iv) (now Section 99) can club that income with the transferor’s income even when the form of the asset changes.

For a jointly funded FD, both holders should retain bank records showing their contributions and report interest according to the genuine ownership arrangement. Merely adding a second name to an FD should not be treated as a tax-planning shortcut.

Senior-Citizen Deduction Under Section 80TTB (now Section 153)

A resident senior citizen may claim a deduction of up to ₹50,000 for eligible interest from bank, cooperative bank and post-office deposits under Section 80TTB (now Section 153). This deduction is different from the ₹1,00,000 TDS threshold. The first affects taxable income; the second affects whether the payer deducts TDS.

Accordingly, senior-citizen FD interest is not automatically tax-free up to ₹1,00,000. The return must apply Section 80TTB (now Section 153) and the relevant tax regime correctly before final liability is determined.

In ITR-2 and ITR-3 for Assessment Year 2026-27, FD interest is reported in Schedule OS under “Interest, Gross” and the line for deposits with a bank, post office or co-operative society. Interest from companies, NBFCs and housing finance companies is shown in the relevant “Others” line in Schedule OS.

Report the gross taxable interest, not merely the amount received after TDS. Then claim the TDS separately using the tax-credit details appearing in the relevant TDS schedule and reconcile it with Form 26AS (now Form 168) and AIS.

The interest remains reportable even when no TDS was deducted, when Form 15G, Form 15H or Form 121 was furnished, or when the interest fell below the payer’s TDS threshold. A declaration stops eligible deductions at source; it does not remove the underlying income from the return.

When interest is credited annually or accrued on a cumulative FD, use the bank’s annual interest certificate or tax statement instead of relying only on the maturity amount. This reduces the risk of reporting several years’ accrued interest incorrectly in one year.

Fixed deposits offer predictable returns, but the interest is generally taxable. The central compliance point is simple: a TDS threshold is not a tax-free limit. From 1 April 2025, the bank and post-office threshold is ₹50,000 for other depositors and ₹1,00,000 for resident senior citizens, while the final tax still depends on total income and available deductions.

Use the correct declaration form for the relevant year; report gross interest in Schedule OS; claim TDS credit separately; and treat a tax-saving FD as a deduction on principal – not an interest exemption. NRIs should check the account type and residential status before applying the resident FD rules.

Also Read: Recurring Deposits vs Fixed Deposits: Which Is Better?