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Fixed Deposits (FDs) are one of the most trusted and safest investment options available in India. With guaranteed returns and minimal risk, FDs are preferred by conservative investors who wish to protect their capital while earning fixed interest. However, many investors fail to consider the tax implications on their Fixed Deposit earnings. This article dives deep into tax on Fixed Deposit to help you understand the tax treatment of FD interest, how it impacts your overall returns, and various ways you can optimize tax savings on Fixed Deposits.
What is a Fixed Deposit (FD)?
A Fixed Deposit is a financial instrument where a lump sum amount is deposited with a bank or financial institution for a fixed tenure at an agreed interest rate. The tenure typically ranges from a few months to several years, and interest is paid either monthly, quarterly, or annually. Fixed Deposits are known for their stability and offer returns at a predetermined interest rate.
However, while FDs are a safe investment option, the tax on Fixed Deposit interest can significantly reduce the returns. It’s crucial to understand how interest from Fixed Deposits is taxed to make informed investment decisions.

How is Tax on Fixed Deposit Interest Calculated?
When you invest in a Fixed Deposit, the interest you earn is subject to tax under the Income Tax Act of 1961. The interest earned on Fixed Deposits is categorized under “income from other sources” and taxed according to the applicable income tax slab.
The key factors affecting the income tax on interest on fixed deposit interest include:
- The amount of interest earned from the FD
- The income tax slab you fall under
- Whether or not Tax Deducted at Source (TDS) applies to your FD interest
Tax Deducted at Source (TDS) on Fixed Deposit
Tax on FD interest is generally deducted at source by banks and financial institutions. If your total interest income from all Fixed Deposits in a financial year exceeds ₹40,000 (for individuals below 60 years) or ₹50,000 (for senior citizens), banks will deduct TDS at 10%. For those who do not provide their PAN details, TDS is deducted at a higher rate of 20%.
While TDS is deducted on interest earned, it is not the final tax liability. You are still required to declare the income in your tax return and pay any additional taxes based on your total income.
Example: Income tax on fixed deposit Interest
Let’s take an example to see how tax affects the returns on a Fixed Deposit:
Scenario: You invest ₹5,00,000 in a Fixed Deposit at an interest rate of 6% per annum for 1 year.
- Interest earned: ₹5,00,000 x 6% = ₹30,000
- Tax applicable: Assuming you are in the 20% tax bracket, the tax on this interest will be 20% of ₹30,000 = ₹6,000.
So, the tax on interest on Fixed Deposit for this example would be ₹6,000, reducing your effective interest to ₹24,000.
- Effective return: ₹30,000 (total interest) – ₹6,000 (tax) = ₹24,000
If TDS of 10% was deducted at source, ₹3,000 would be withheld, and you would receive ₹27,000 initially. Upon filing your tax return, if you are in the 20% tax bracket, you would pay an additional ₹3,000 (since ₹3,000 was already deducted), bringing the total tax to ₹6,000.
Tax on Fixed Deposit Interest for Senior Citizens
Senior citizens (aged 60 years and above) enjoy some additional tax benefits. Tax on Fixed Deposit interest for senior citizens has a higher exemption limit for TDS. If the total interest income from Fixed Deposits exceeds ₹50,000 in a financial year, TDS is applicable. However, senior citizens do not need to submit Form 15G ( can download from here) or Form 15H if their FD interest exceeds ₹50,000, unlike regular taxpayers who must do so to avoid TDS if their total income is below the taxable limit.
Moreover, senior citizens are entitled to a higher exemption limit for TDS on interest earned, which makes them eligible for reduced TDS deductions, allowing for more of their interest to be received.
Tax Slabs and FD Interest
The tax on Fixed Deposit interest is added to your total income and taxed according to the income tax slabs applicable to your total income. The interest on Fixed Deposit will be taxed based on the tax bracket you fall under, which is as follows:
Income Range (₹) | Tax Rate |
---|---|
Up to ₹2.5 Lakhs | Nil |
₹2.5 Lakhs – ₹5 Lakhs | 5% |
₹5 Lakhs – ₹10 Lakhs | 20% |
Above ₹10 Lakhs | 30% |
For instance, if you fall in the 20% tax bracket, the interest on Fixed Deposit you earn will be taxed at 20%. It’s important to note that the FD interest will be included in your total income, and the total tax liability will be calculated accordingly.
Tax on Fixed Deposit Interest in Joint Accounts

In the case of joint Fixed Deposits, the income tax on Fixed Deposit interest will depend on the proportion of the FD and the PAN details provided. The interest earned will be divided among the account holders based on the ratio of the deposit. For example, if two individuals hold a joint FD, and the interest earned is ₹80,000, then each account holder will be taxed on ₹40,000, assuming the share is 50-50.
The tax on FD interest in joint accounts will be applicable based on the ownership share and PAN details linked to the account. This means that the interest is taxable in the hands of the individual whose PAN is associated with the FD.
Premature Withdrawal of Fixed Deposit
If you wish to withdraw your Fixed Deposit prematurely, the bank will charge a penalty, which reduces the effective interest rate. Despite the penalty, the interest on Fixed Deposit earned until the withdrawal will still be subject to tax.
The TDS will be deducted on the interest earned up to the date of premature withdrawal, and you will be liable to pay taxes accordingly. If TDS has been deducted and your overall income is below the taxable threshold, you can claim a refund when you file your income tax return.
Corporate Fixed Deposits and Taxation
Corporate Fixed Deposits also follow the same taxation structure as regular Fixed Deposits. However, interest rates on corporate FDs are generally higher than those offered by banks. While this may seem attractive, it is essential to factor in the income tax on Fixed Deposit interest and the risks associated with corporate bonds before investing.
For corporate FDs, TDS is also applicable if the interest earned exceeds ₹40,000 (₹50,000 for senior citizens). Investors must assess the risk and return profile of corporate Fixed Deposits to ensure they are comfortable with the risk involved.

Tax on Fixed Deposit Interest in the Case of Non-Residents (NRI)
For Non-Resident Indians (NRIs), the tax on Fixed Deposit interest is slightly different. The interest earned on FD accounts held by NRIs is subject to TDS at 30%, irrespective of the income tax slabs. NRIs can avail of the benefit of a Double Taxation Avoidance Agreement (DTAA) if they reside in a country with which India has an agreement.
NRIs should file their tax returns in India to claim any possible refund of the TDS deducted, as the interest income is subject to taxation under Indian tax laws.
Tax Saving Fixed Deposit or fd tax exemption
Some Fixed Deposits offer tax-saving benefits under Section 80C of the Income Tax Act. These are 5-year tax saving Fixed Deposits, and the principal amount invested in such FDs is eligible for tax deductions up to ₹1.5 lakh in a financial year. However, the interest earned on these FDs is still taxable, though the initial investment is eligible for tax exemption under Section 80C.
Investors looking for tax-saving opportunities through FDs can consider opting for these tax-saving instruments. But be cautious, as the interest earned will still be taxed, and premature withdrawal is not allowed in these FDs.
How to Reduce Tax on Fixed Deposit Interest
Here are a few ways to minimize your tax on Fixed Deposit interest:
- Submit Form 15G or 15H: If your total income is below the taxable limit, submitting Form 15G (for individuals below 60) or Form 15H (for senior citizens) to the bank will help you avoid TDS on Fixed Deposit interest.
- Choose tax saving fixed deposit: Opt for 5-year tax saving fd that are eligible for tax deductions under Section 80C. This will allow you to save on taxes while earning guaranteed returns.
- Invest in Bonds: If you are looking for tax-free income, consider investing in tax-free bonds that offer interest exempt from tax under Section 10(15).
- Consider Tax-Exempt Schemes: Some specific tax-free bonds, such as those issued by government agencies, might also be beneficial for investors looking to save on taxes.
Conclusion: Tax on Fixed Deposit is an Important Factor to Consider

While Fixed Deposits are a safe and reliable investment option, the tax on Fixed Deposit interest can reduce your returns over time. Understanding the tax implications of FD interest is crucial for investors who want to maximize their returns. By planning your investments wisely, taking advantage of tax-saving FDs, and considering alternatives, you can mitigate the impact of taxes on your FD earnings.
Remember to always assess your tax bracket, submit the appropriate forms to avoid TDS, and explore tax-saving instruments to make the most of your Fixed Deposit investment. You can read more articles here.