How To Avoid TDS On Bank Fixed Deposits?

How To Avoid TDS On Bank Fixed Deposits?

Bank fixed deposits are one of the most popular investment options for many. What is the tax treatment of interest earned from the bank fixed deposit? What are the TDS or tax deducted at source provisions? Interest on bank fixed deposit (FD) is fully taxable. Banks are liable to deduct TDS at the rate of 10 per cent on the interest earned (based on FD interest rates) if the interest income for the year is more than Rs. 10,000. If the depositor doesn't furnish Permanent Account Number (PAN) with the bank, TDS would be deducted at the rate of 20 per cent.

Bank fixed deposit investors who are not in the tax bracket are advised to furnish Form 15G/15H to avoid getting the TDS deducted by the bank. If one fails to do so, the person will need to claim the tax refund by filing his/her income tax return which will be a long wait as the return would be filed by next July and refund may take another 1-2 months.

Fixed deposit interest received (as per FD interest rates) is added along with other income and you have to pay tax on that income at a tax rate that's applicable to you. They are shown under income from other sources.

For those who come under tax slabs, here is a caution. Sandeep Sehgal, director of tax and regulatory at Ashok Maheshwary & Associates LLP, says: "It would be counterproductive for him/her to have no TDS deducted as advance tax provisions are applicable for other income and the person may not have paid adequate advance tax when these were due and will result in payment of interest along with taxes. If some amount is already paid as TDS, the person can save interest at least to that extent."

Form 15G or Form 15H?

If your total taxable income during the financial year is not likely to exceed taxable limit, then you can submit self-declaration in Form 15G or 15H (for senior citizens only) to the bank to ensure non-deduction of tax at source (TDS). It should be noted that if the interest payable by the bank during the financial year on fixed deposits exceeds the taxable limit, then the Form 15G submitted will be treated as invalid. Many banks allow submission of Form 15G or 15H forms online.

Timing your investments

You can time investments, if possible, in such a way that interest for the year doesn't exceed Rs. 10,000 in a particular financial year. For example, a 12-month fixed deposit could be started in October as financial year closes on 31st March. This way, the interest would split in two financial years and hence TDS will be avoided.

Distribute your investments across banks

You can also distribute your fixed deposits across banks to avoid TDS. Remember, as per the tax norms, if the interest on fixed deposits across branches of the same bank is more than Rs. 10,000, the lender is liable to deduct TDS.

Second applicant

In case of joint fixed deposit holders, it is the first account holder against whose PAN, TDS is deducted. The tax liability is calculated on the first applicant's name only. The interest on deposits in joint names is paid to the first depositor.