Understanding Fixed Deposit Taxation in India
Your fixed deposit might seem like a straightforward investment, but taxes significantly impact your actual returns. Even senior citizens who enjoy several concessions ended up paying the central government over ₹27,000 crore in taxes on interest earned from term deposits in FY2023-24.
The Union Budget 2025-26 raised TDS exemption limits—general citizens now enjoy a ₹50,000 annual exemption, whilst senior citizens get ₹100,000. However, all fixed deposit interest remains taxable as “income from other sources”, making tax planning crucial for maximising returns.
How Fixed Deposit Interest Gets Taxed
Fixed deposit interest follows your regular income tax slab rates—5%, 10%, 15%, 20%, or 30%. This means higher earners face steeper tax burdens on their fixed deposit returns.
Consider Rajesh, a software engineer earning ₹12 lakh annually. His ₹5 lakh fixed deposit at 7% generates ₹35,000 interest. Since he falls in the 30% tax bracket, his tax liability equals:
Tax Payable = ₹35,000 × 30% = ₹10,500
His effective post-tax return drops to 4.9% instead of the promised 7%. This calculation demonstrates why understanding taxation on fixed deposits matters for realistic return expectations.
Income Slab Impact on Returns
| Annual Income | Tax Slab | FD Interest (₹50,000) | Tax Payable | Effective Return |
| Up to ₹2.5 lakh | 0% | ₹50,000 | ₹0 | 7.0% |
| ₹2.5-5 lakh | 5% | ₹50,000 | ₹2,500 | 6.65% |
| ₹5-10 lakh | 20% | ₹50,000 | ₹10,000 | 6.3% |
| Above ₹10 lakh | 30% | ₹50,000 | ₹15,000 | 5.9% |
TDS Rules and Calculation Methods
Banks deduct Tax Deducted at Source (TDS) when your fixed deposit interest exceeds specific thresholds. For 2025, TDS applies at 10% if annual interest from one bank exceeds ₹50,000 (₹100,000 for senior citizens).
TDS Calculation Example
Suppose you invest ₹8 lakh in a fixed deposit scheme at 7.5% for one year:
Annual Interest = ₹8,00,000 × 7.5% = ₹60,000
Since this exceeds ₹50,000, TDS calculation becomes:
TDS Deducted = ₹60,000 × 10% = ₹6,000
You receive ₹54,000 in your account but must pay additional tax if you’re in higher slabs. If you’re in the 30% bracket:
Actual Tax Liability = ₹60,000 × 30% = ₹18,000
Additional Tax Payable = ₹18,000 – ₹6,000 = ₹12,000
| Pro Tip: Submit your PAN card details to avoid the 20% TDS rate applied when PAN is missing. Always ensure banks have your correct PAN information. |
Strategic Tax Planning for Fixed Deposits
Smart fixed deposit investors use several strategies to minimise tax impact whilst staying compliant.
Form 15G and 15H Declarations
If your total income stays below taxable limits, submit Form 15G (for those under 60) or Form 15H (for senior citizens) to avoid TDS deduction entirely. The Airtel Finance FD platform allows easy digital submission of these forms.
Bank-wise Interest Distribution
Since TDS applies per bank, you can strategically split investments across multiple banks to stay below the ₹50,000 threshold per institution. This approach requires careful tracking but can defer TDS until tax filing.
Tax-Saver Fixed Deposits
Five-year tax-saver Fixed Deposits offer Section 80C deduction up to ₹1.5 lakh on the principal amount. However, the interest earned remains fully taxable. Calculate whether the lock-in period justifies the tax benefit:
Tax Saved = ₹1,50,000 × Your Tax Slab Rate
For someone in the 30% bracket: ₹1,50,000 × 30% = ₹45,000 tax reduction.
Senior Citizen Tax Benefits
Senior citizens enjoy enhanced tax benefits on fixed deposit investments. Section 80TTB allows a ₹50,000 annual deduction on interest income, whilst the higher TDS threshold of ₹1,00,000 provides additional relief.
Senior Citizen Calculation Example
Mrs. Sharma (age 68) invests ₹12 lakh at 8% in Fixed Deposit:
Annual Interest = ₹12,00,000 × 8% = ₹96,000
Her tax calculation:
- Taxable Interest = ₹96,000 – ₹50,000 (80TTB deduction) = ₹46,000
- TDS = ₹0 (below ₹1,00,000 threshold)
- Tax Payable = ₹46,000 × 20% = ₹9,200
This demonstrates significant savings compared to regular taxpayers.
| Did You Know? This deduction applies over and above the standard income tax exemption, making fixed deposits more attractive for senior citizens. |
Maximising Post-Tax Returns
Consider these additional strategies:
- Timing Interest Receipt: Plan FD maturity across financial years to manage tax brackets
- Family Income Distribution: Invest in lower-earning spouse’s name for tax efficiency
- NRE Account Benefits: NRI investors can earn tax-free interest through NRE Fixed Deposits
Smart Fixed Deposit Tax Management
Taxation on fixed deposits significantly impacts your wealth creation journey, but strategic planning minimises this burden. Understanding TDS rules, utilising available exemptions, and timing your investments optimally ensures maximum post-tax returns.
Consider your overall tax situation when choosing fixed deposit tenures and amounts. Senior citizens should leverage enhanced benefits, whilst younger investors might explore tax-saver options for dual benefits. Regular monitoring of fixed deposit interest rates ensures you’re maximising returns within tax-efficient frameworks.
Start your tax-optimised Airtel Finance Fixed Deposit journey today with an advanced digital platform, offering transparent tax calculations and seamless compliance support for informed investment decisions.
FAQs
1. Can I completely avoid paying tax on fixed deposit interest?
Tax applies to all fixed deposit interest as per your income slab. However, you can use Form 15G/15H to avoid TDS if total income stays below taxable limits.
2. What happens if I don’t provide PAN for my fixed deposit?
Banks deduct TDS at 20% instead of 10% when PAN details are missing. Always submit valid PAN information to minimise unnecessary tax deductions.
3. Do tax-saver fixed deposits offer complete tax exemption?
Only the principal amount qualifies for Section 80C deduction up to ₹1.5 lakh. All interest earned remains taxable according to your applicable income tax slab.
4. How do senior citizens calculate tax on fixed deposit interest?
Senior citizens can claim a ₹50,000 deduction under Section 80TTB and face TDS only when annual interest exceeds ₹1,00,000 from one bank institution.
5. Can I claim a TDS refund on excess fixed deposit tax deduction?
Yes, file your income tax return to claim refunds if TDS exceeds actual tax liability. Maintain proper documentation for smooth refund processing through the IT department.