Fixed Deposits (FDs) have long been a popular investment option for Indian investors due to their safety and predictable returns. However, one common concern is the Tax Deducted at Source (TDS) on the interest earned. If you’re earning more than a certain threshold from FDs, banks are required to deduct TDS. But did you know that there are legal ways to avoid TDS on fixed deposits?
In this detailed guide, we will walk you through how to legally avoid TDS on FD interest, what forms to submit, exemptions available, and strategies to minimize tax liability while staying compliant.
✅ What is TDS on Fixed Deposits?
TDS stands for Tax Deducted at Source. Banks and financial institutions deduct a certain percentage of tax from the interest income you earn on your FDs.
📊 TDS Rates on Fixed Deposits
| Particulars | TDS Rate |
|---|---|
| PAN Submitted | 10% |
| PAN Not Submitted | 20% |
| NRI FD (as per DTAA or Section 195) | 30% or as applicable |
Note: TDS is only applicable if the total interest earned in a financial year exceeds ₹40,000 (₹50,000 for senior citizens).
🔍 When is TDS Deducted on FD?
- TDS is deducted annually or at the time of interest credit (even if not withdrawn).
- It applies to all FD accounts held in your name across branches of the same bank.
Example:
If you have ₹6 lakh in an FD earning 7% annually:
- Interest earned = ₹42,000
- TDS applicable = 10% of ₹42,000 = ₹4,200 (if PAN is provided)
🧾 Legal Ways to Avoid TDS on Fixed Deposits
1. Submit Form 15G / 15H
One of the most effective ways to avoid TDS legally is to submit Form 15G or Form 15H.
| Form Type | Who Can Submit | Eligibility Criteria |
|---|---|---|
| Form 15G | Individuals below 60 years | Taxable income is NIL |
| Form 15H | Senior Citizens (60+) | Taxable income is NIL |
Conditions:
- Total income including FD interest should be below the taxable limit.
- Submit these forms at the beginning of the financial year to avoid unnecessary TDS.
👉 Submit Form 15G/H online via your bank’s net banking portal or in person at the branch.
2. Distribute FD Amounts Across Banks
To stay below the TDS threshold, split your FD investments across multiple banks or branches.
Example:
| Bank | FD Amount | Interest @ 7% | TDS Deducted |
|---|---|---|---|
| Bank A | ₹4 lakh | ₹28,000 | No |
| Bank B | ₹3 lakh | ₹21,000 | No |
| Total | ₹7 lakh | ₹49,000 | 0 TDS |
By keeping interest under ₹40,000 per bank, you legally avoid TDS.
3. Opt for Short-Term or Quarterly FDs
Instead of locking funds for a long time, choose short-term or quarterly FDs. This ensures your annual interest income stays below the limit, especially if you reinvest interest or withdraw periodically.
Tip: Reinvest interest in fresh FDs under different tenures to better manage TDS thresholds.
4. Invest in Tax-Free Alternatives
Consider investing in tax-free instruments instead of regular FDs:
| Alternative | Taxation | Returns (Approx.) |
|---|---|---|
| PPF (Public Provident Fund) | Tax-Free | 7.1% |
| Tax-Free Bonds (Govt.) | Tax-Free | 6–7% |
| SCSS (Senior Citizen Savings Scheme) | TDS applicable but higher exemption | 8.2% |
Although not completely replacing FDs, these alternatives offer tax-efficient returns and reduce overall tax liability.
5. Use FD Laddering Strategy
FD laddering involves splitting your investments into multiple FDs with different maturity dates. This helps you:
- Stay below the ₹40,000 annual interest cap
- Avoid bulk interest credit in one year
- Plan redemptions and renewals smartly
Example: Instead of ₹5 lakh in a 1-year FD, split into:
- ₹1 lakh in 3 months
- ₹1 lakh in 6 months
- ₹1 lakh in 9 months
- ₹2 lakh in 12 months
This spreads interest across different time frames and reduces TDS risk.
📌 What Happens If TDS Is Deducted?
If your bank deducts TDS even though your income is below the exemption limit:
- You can claim a refund while filing your Income Tax Return (ITR).
- Use Form 26AS to check the TDS amount deducted.
- Ensure all PAN and bank account details are correctly linked in the ITR.
📤 How to Submit Form 15G/15H Online?
Most major banks like SBI, ICICI, HDFC, Axis, and others allow online submission of Form 15G/15H.
✅ Steps (General):
- Log in to your internet banking
- Go to “Tax Services” or “Form 15G/H Submission”
- Fill in PAN, estimated income, and FD details
- Submit and download the acknowledgment
Pro Tip: Submit every financial year – forms expire annually.
🧓 Special Benefits for Senior Citizens
Senior citizens get an enhanced interest exemption of ₹50,000 per year under Section 80TTB.
Example:
| Particulars | Amount |
|---|---|
| Interest earned | ₹60,000 |
| Section 80TTB Exemption | ₹50,000 |
| Taxable Interest | ₹10,000 |
| TDS Deducted | If Form 15H not submitted |
Senior citizens can also consider:
- Senior Citizen Saving Scheme (SCSS)
- PM Vaya Vandana Yojana (PMVVY)
- Monthly Income Scheme (MIS)
These give higher interest and tax flexibility.
🧾 Form 26AS and AIS: Monitor Your TDS
Always check your Form 26AS and Annual Information Statement (AIS) for:
- TDS details
- Interest income reported by banks
- Any discrepancies to be corrected before filing ITR
Where to check:
- https://incometax.gov.in
- Login → View Form 26AS / AIS
🛡️ Key Tips to Avoid TDS Legally on FDs
| Tip | Benefit |
|---|---|
| Submit Form 15G/15H annually | Avoid TDS if income below limit |
| Diversify FD across banks | Keep per-bank interest below ₹40k |
| Choose short-term / quarterly payouts | Manage annual interest |
| Use laddering strategy | Spread income across tenures |
| Consider tax-free investment alternatives | Improve post-tax returns |
| File timely ITR to claim refund if needed | Avoid tax loss |
⚠️ Common Mistakes to Avoid
- Not submitting Form 15G/15H on time
- Incorrect PAN or income estimate
- Assuming TDS = final tax (you may owe more or get refund)
- Overlooking multiple FDs across branches
- Ignoring Form 26AS before filing ITR
🧮 Should You Avoid TDS or Just Pay It?
Avoiding TDS is not about tax evasion — it’s about timing and cash flow. If you’re eligible for exemption, avoid TDS to:
- Prevent unnecessary deductions
- Maintain liquidity
- Avoid the hassle of refunds
But if your income is taxable, it’s better to let TDS happen and settle the tax at year-end via ITR.
✅ Conclusion
Avoiding TDS on fixed deposits legally is possible with careful planning and by using the provisions offered under Indian tax laws. From submitting the right forms to strategically splitting investments, there are multiple smart ways to ensure your interest income remains tax-efficient.
Stay informed, check your income regularly, and always comply with income tax rules to enjoy the benefits of fixed deposits without any tax headaches.