Don’t Let Taxes Eat Your Returns: The Reality of Fixed Deposit Taxation in India
Fixed deposits (FDs) are a cornerstone of many investment portfolios, prized for their security and stable returns. But what many investors fail to realize is that a safe investment isn’t always a tax-efficient one. Earning a seemingly attractive 6-7% on an FD can quickly turn into a sub-5% return after taxes, depending on your income slab.
As CA Nitin Kaushik warns, it’s crucial to understand the tax implications before you invest. This guide breaks down everything you need to know about FD interest taxation, highlighting the critical differences between the old and new tax regimes.
The Unavoidable Tax on FD Interest
Many investors mistakenly believe they can avoid paying tax on FD interest, but this is a myth. The reality is that FD interest is fully taxable.
- It’s Not Hidden: Your bank reports all interest earned to the income tax department. This information is automatically reflected in your Annual Information Statement (AIS) and Form 26AS, making it impossible to hide.
- Deemed Earned: Even if you reinvest the interest and don’t withdraw it, the income is considered “deemed earned” annually. You must report this amount in your Income Tax Return (ITR) for the financial year.
- Income from Other Sources: FD interest is classified under the tax head “Income from Other Sources” and is added to your total income before being taxed at your slab rate.
TDS Rules for FY 2025-26
To ensure tax compliance, banks deduct Tax Deducted at Source (TDS) on your FD interest.
- Non-Senior Citizens: TDS applies if your interest income from all FDs with a single bank exceeds ₹50,000 in a financial year.
- Senior Citizens: The threshold is higher at ₹1 lakh, offering more relief to retirees.
- TDS Rates: The bank will deduct 10% TDS if you have provided your PAN. If you haven’t, a higher rate of 20% is applied.
- Below the Threshold: Even if your interest falls below the TDS threshold, the income is still taxable. You are responsible for declaring it in your ITR and paying the tax due.
Old vs. New Tax Regime: The Critical Choice
The tax regime you choose has a major impact on the post-tax returns of your FD.
Old Tax Regime: Built for Tax Planning
The old regime allows for various deductions, making it a more attractive option for many FD investors, especially senior citizens and those looking for tax-saving options.
- Section 80C: Investments in a 5-year tax saver FD (with a lock-in period) up to ₹1.5 lakh are eligible for a deduction. This directly reduces your taxable income.
- Section 80TTB (for Seniors): Senior citizens can claim a deduction of up to ₹1 lakh (increased for FY 2025-26) on interest earned from all deposits, including FDs. This can significantly reduce or even eliminate their tax liability on this income.
New Tax Regime: Built for Simplicity
The new regime aims to simplify taxes by offering lower slab rates but removing most common deductions.
- No 80C or 80TTB Benefits: Under this regime, you cannot claim deductions for tax saver FDs or the special exemption for senior citizens under Section 80TTB.
- Interest Fully Taxable: All FD interest income is fully taxable at your applicable slab rate.
- The 87A Rebate: The key advantage here is the expanded rebate under Section 87A. If your total income is ₹7 lakh or below, your tax liability can be completely wiped out. This might make the new regime a better choice for some younger, low-income earners.
Real-Life Scenarios: Understanding the Impact
Mr. X (35 years old, FD interest ₹60,000)
- The interest exceeds the ₹50,000 threshold, so the bank deducts ₹6,000 as TDS (10%).
- Old Regime: If he invested in a tax saver FD, he can claim an 80C deduction, which lowers his overall tax. This makes the FD more tax-efficient.
- New Regime: He cannot claim any deduction. However, if his total income is below ₹7 lakh, the Section 87A rebate may save him from paying any tax. For those with higher incomes, the new regime offers no FD-related tax relief.
Mr. Y (65 years old, FD interest ₹40,000)
- The interest is below the ₹1 lakh senior citizen threshold, so the bank deducts no TDS. He receives the full amount.
- Old Regime: This is the most beneficial option. He can use the Section 80TTB deduction to claim a tax exemption on the full ₹40,000 interest, effectively making it tax-free.
- New Regime: The 80TTB deduction is unavailable. The entire ₹40,000 is added to his taxable income.
Final Takeaway for Investors
While FDs offer safety, they are not a tax-friendly investment. The final yield can be significantly lower than the stated interest rate.
As CA Kaushik advises: “Don’t just look at the interest rate; always calculate the post-tax yield to understand the real returns.”
Choosing the right tax regime and understanding how taxes affect your earnings are crucial steps to ensuring your money truly grows over time.