Income Tax on FD Interest in India (FY 2025-26)
Fixed Deposits (FDs) are one of the most preferred saving and investment tools for most Indians. They are simple, secure, and offer steady returns, making them ideal for both new investors and experienced savers.
However, not all the interest earned from an FD is yours to keep. Interest earned on fixed deposits is considered taxable income and falls under your overall income tax bracket. This is where the concept of income tax on FD interest and tax deducted at source (TDS) comes into play.
If you’re concerned about the tax you need to pay or looking for ways to minimize it, this guide has the answers.
Is Interest on FDs Taxable?
Yes, interest earned on FDs is fully taxable in India.
- The bank pays you interest, which is counted as part of your total income for the financial year.
- The tax is applied according to the income tax slab you belong to.
- Example: If you earn ₹60,000 in FD interest and belong to the 20% tax slab, you will need to pay ₹12,000 as tax.
Key Points:
- In your Income Tax Return (ITR), FD interest is classified as ‘Income from Other Sources’.
- Even if the bank deducts TDS, it is not the final settlement; you may have to pay extra tax if applicable.
- If you fall into a higher tax bracket, additional tax may be due when filing your ITR.
What is Income Tax on FD Interest?
TDS (Tax Deducted at Source) is a tax that the bank withholds before crediting interest to your account. It acts as a prepayment of your final tax liability.
When Does TDS Apply?
- For individuals under 60 years: If FD interest income exceeds ₹50,000 per year.
- For senior citizens: The threshold is ₹1 lakh per year.
TDS Rates for FY 2025-26:
Scenario | TDS Rate |
If PAN is provided | 10% |
If PAN is NOT provided | 20% |
Example: If you earn ₹80,000 in FD interest, and the bank deducts 10% TDS, it will withhold ₹8,000, and you will receive ₹72,000.
How to Check and Claim TDS?
- Verify the TDS deduction using Form 26AS and AIS (Annual Information Statement).
- If your total taxable income is below the exemption limit, you can claim a refund when filing ITR.
What’s New in TDS Rules for FY 2025-26?
Higher TDS Thresholds
- The TDS exemption limit is ₹50,000 (previously ₹40,000) for regular taxpayers.
- For senior citizens, the threshold is ₹1 lakh (previously ₹50,000).
Updated Exemption Limits
- Under the new tax regime, the basic exemption limit has increased to ₹4 lakh (previously ₹2.5 lakh).
Advance Tax Applicability
- If your total tax liability (including FD interest) exceeds ₹10,000 in a year, you may need to pay advance tax in four installments.
How to Avoid TDS on FD Interest?
Yes, it is possible to legally avoid TDS, provided your income is below the taxable limit. You must submit certain forms to your bank:
Form | Who Can Use It? |
Form 15G | Individuals below 60 years with income below the taxable limit |
Form 15H | Senior citizens with total income below ₹4 lakh (new regime) |
Pro Tip: Submit these forms in April each year to prevent unnecessary deductions.
FD Tax Exemptions for Senior Citizens
Senior citizens enjoy tax benefits under Section 80TTB, allowing a deduction of up to ₹50,000 on interest income from FDs, savings accounts, and recurring deposits.
Example:
- If a senior citizen earns ₹1.5 lakh in FD interest, the first ₹1 lakh is TDS-free.
- They can also claim ₹50,000 as a deduction, making only ₹50,000 taxable.
How to Calculate Tax on FD Interest?
- Check Your Interest Earned: Banks provide annual interest statements.
- Add It to Your Total Income: Include under ‘Income from Other Sources’ in ITR.
- Apply Your Tax Slab Rate: The applicable tax rate will depend on your income bracket.
Pro Tip: Use an online tax calculator to simplify the process.
Tips to Save Tax on FD Interest
- Spread Deposits Across Banks: Ensure individual FD interest remains below the TDS threshold.
- Use Joint FDs: Allocate income to family members in lower tax brackets.
- Opt for Tax-Saving FDs: These have a 5-year lock-in and offer deductions under Section 80C.
P2P Lending: A Better Alternative to FDs?
Fixed deposits (FDs) are surely safe and provide guaranteed returns but the interest rates may not be the highest in a low-rate environment. And, that is where P2P lending in India comes in as an attractive alternative.
Peer to peer lending platforms are those that create an avenue between borrowers and lenders without any financial intermediaries.
Investors may get higher interest annually on their loans depending on the platform and borrowers profile.
In P2P lending as opposed to FDs, you have the option to invest in different borrowers, enabling risk reward balance unlike fixed income instruments such as FDs.
Why Consider P2P Lending?
- Potential Higher Returns: Often higher than FD interest rates.
- Flexibility: Choose loan tenures and borrowers based on risk appetite.
- Diversification: Spread investments across multiple borrowers to balance risks.
If you wish to grow your wealth at a higher pace and are willing to try modern-day investment tools, you could look to P2P lending along with your traditional FDs.
Pro Tip: Always invest through RBI-approved P2P platforms like LenDenClub to avoid risks.
FAQs about TDS on Fixed Deposit
However, If TDS on total income is more than your income tax liability, you can claim a refund for excess TDS by filing ITR and mentioning your total income and tax deducted. The refunded amount will be credited to your bank account after processing of your ITR.
The interest earned on joint FDs is taxed in the income tax slab of the primary account holder (whose name comes first in the FD account). The second holder is not liable to pay tax on the FD.
Yes, although tax-saving FDs are eligible for deductions under Section 80C for amounts invested, the interest earned is fully taxable and needs to be declared under ‘Income from Other Sources’.
Under the Income Tax laws, interest can be offered on a cash basis (as and when received) as opposed to accrual basis (as and when it becomes due). This could be useful if you like delaying the tax payment until you actually take receipt.
No, reinvestment of interest income into a fresh FD is not tax-free. Interest becomes taxable in the year earned regardless of whether it is reinvested.
No, reinvestment of interest income into a fresh FD is not tax-free. Interest becomes taxable in the year earned regardless of whether it is reinvested.
The Income Tax Department can impose fines or penalties for not declaring FD interest. Failure to pay taxes on FD interest on time leads to penalty in the form of additional interest under Section 234B (tax due as on the end of the financial year) and Section 234C.
No, interest earned on NRE FDs is completely tax-free under Indian income tax laws — as long as the account holder is considered a Non-Resident Indian (NRI) for that financial year. Furthermore, Interest Income earned from the NRE FDs is also exempt from TDS.
The answer is Yes, TDS will be applicable on interest earned from fixed deposits maintained in co-operative banks after the amendments made in the Finance Act, 2020.
Conclusion
Understanding income tax on FD interest helps you make informed decisions. With new TDS thresholds and relaxed exemption limits, you can optimize tax savings. Ensure timely submission of forms and keep track of your Form 26AS and AIS for TDS details.
Maximize your savings by staying informed. It’s your money—make it work for you!
Team LenDenClub
LenDenClub is India’s largest alternate investment platform which started operations in India in 2015. We have been helping investors diversify their investments beyond traditional investment instruments ever since.