How to AVOID paying TDS on fixed deposits

There are in fact four easy ways to earn interest on fixed deposits and keep it too.

Fixed deposits (FDs) are one of the most-favored investment instruments in India. FD can be defined as a financial investment where money is invested for a fixed tenure at a pre-agreed interest rate.

There are many varieties of FD schemes available in the market, and an investor can opt one depending on its need and suitability.

Before we get into the details of how to avoid paying TDS on interest earned on FDs let us take a look at some important FD schemes:

1. Regular FD schemes

In this FD scheme, the tenure is fixed for a period ranging from 1 week to 10 years. The interest rate of each period is pre determined, and an investor can choose FD for a suitable period.

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2. Tax-saving FD

This scheme attracts such investors who want to invest for saving income tax. There is a compulsory lock-in of five years under this scheme, and fund cannot be withdrawn before completion of this period.

3. Special FD schemes

Special tenure FD schemes are available in the market where the fund can be invested for a special period like 333,399 or 555 days, and rate of interest is higher for such schemes.

4. Recurring deposit (RD) scheme

This scheme is another popular investment option available to the investors. Under this scheme, investors can regularly deposit a fixed amount every month for a FD of fixed tenure and at a pre decided interest rate. The corpus keeps on growing every month up to the maturity period.

5. Floating FD schemes

Under this scheme, an investor can opt for a market-based interest rate. The rate of interest is renewed automatically with the change in the base rate.

Other important points before opting for FDs

1. Interest calculation

It varies in the market, and monthly, quarterly, half-yearly and yearly interest calculation are available under different conditions.

2. Interest payout

An investor has the option to reinvest interest and increase the FD corpus or to receive the regular payout every month.

3. Penalty

Some institutions penalise for breaking the FD before maturity by lowering the interest rates. Investor can search for such banks/institution that has the lowest penalty for pre maturity liquidation of FD.

Tax deduction on FD interest

The interest earned under the FD is taxable under the head 'Income from other Sources'.

The amount invested under 80C of the income tax act, is exempt but the interest earned under such investment are taxable. If the interest earned under FD exceeds Rs 10,000 in a financial year, then it would be eligible for tax deduction at source (TDS) at 10 per cent plus 3 per cent education cess i.e total 10.3 per cent of the interest earned.

For example, if an investor has earned Rs 20,000 as an interest in one year, then the bank would deduct Rs 2,000 and pay only Rs 18,000 as the amount exceeds the limitation of Rs 10,000.

The TDS limits for companies deposit schemes are Rs 5,000 only. It means if the interest earned from a company deposit exceeds Rs 5,000, then the investors are liable for a TDS on interest earned.

How to save TDS on FD?

An investor can save TDS by many ways. Following are some vital points to save TDS on FD:

1. By submitting Form 15G/15H

If the investor submits Form 15G stating that he has no taxable income, then the bank would not deduct any TDS from the interest earned. For senior citizens, the requisite form is 15H to avoid TDS.

2. Distributing FD investment

Another way to avoid the TDS is by splitting the FD to separate banks in such a way that interest earned from any of the FD does not exceed the Rs 10,000 limits.

3. Timing the FD

The TDS can also be saved by timing the FD in such a way that interest for any of the financial years does not exceed Rs 10,000.

For example, a 12-month FD of Rs 1 lakh @ 10.5 per cent could be started in September as the financial year closes on March 31 so the interest would split in two financial years, and hence TDS could be avoided.

4. Splitting FD another way

A person can start FD under personal bank account and another FD under HUF account, and then both can be treated separate. So an investor with HUF identity can split FD under such two heads.

Fixed deposit is an all-time favorite financial investment instrument. It provides a handsome return as well as liquidity at the time of need to an investor. Looking at the volatility, high associated risk and less assured return by other financial instruments, the attractiveness of FD is set to grow in the future.