Last year return of fixed deposit beat both Nifty returns and returns from gold. While investors in gold faced negative returns, the Nifty gained just 3.80 per cent in 2018. Bank fixed deposits pre-tax returns had generated as much 6.50-7.50 per cent.
Keeping in the mind the above statistics, one more benefit of investing in bank fixed deposit is that it saves your tax as it is covered under section 80C of income tax of India. But not all the fixed deposits save tax, a term deposit of 5 years falls under this category.
Investing in a 5-year tax saving fixed deposit only saves tax on the amount of invested, return of fixed deposit i.e. interest is always taxable under the head “Income from Other Sources”.
Bank deducts TDS @ 10% plus 4% education cess (total 10.40%) from the interest earned under section 194A, if the interest earned exceeds ₹ 40,000 per annum in a financial year. However, if you do not provide PAN No. to your bank, TDS @ 20% will be deducted (Only if interest on Fixed Deposits exceeds ₹ 40,000 per annum).
For example, if an investor invests ₹ 5,00,000 @ 10% p.a. earning interest of ₹ 50,000 in one year. The bank would deduct TDS of ₹ 5,000 from the interest of ₹ 50,000 and credit only ₹ 45,000 as the interest amount exceeds the threshold limit of ₹ 40,000.
This made this scheme semi-lucrative but there are few ways with which you can save TDS on Fixed Deposit Interest.
1. Submit form 15G/15H
In case your income is unlikely to cross the maximum amount not chargeable to tax, do not forget to submit the Form 15G or Form 15H (for senior citizens) at the beginning of the financial year. This will ensure that no TDS would be deducted by the bank on your fixed deposit interest.
Recommended Read: Fill Form 15G and Form 15H to Avoid TDS on Interest Income
2. Invest mid-year or Timing Fixed Deposit
Another way to save TDS on Fixed Deposit interest is to invest in FD in such a way that the interest earned in a financial year would not cross the threshold limit of ₹ 50,000.
For example, a 12-month fixed deposit of ₹ 100,000 at 10.5 per cent could be started in September instead of April as the financial year closes on 31st March. This way, the interest earned would be of two financial years, thus saving TDS on interest earned.
3. Divide/Splitting your investment
TDS can also be saved by investing in FD under the name of different entities. An individual can start one fixed deposit under his/her personal bank account and another one under a HUF account, ensuring the annual interest is less than ₹ 40,000 for each FD. This way both will be treated as separate thus saves you TDS.
Recommended Read: Online FD Receipt Initiative from Bank of Baroda
4. Spread across Branches or Banks
Another way to avoid TDS is by splitting the deposit into separate banks in such a way that interest earned from any of the FDs does not exceed the ₹ 40,000 limits.
For example, if you wish to invest ₹ 4,50,000 in Fixed Deposit at interest rate 10% p.a. to earn a return of ₹ 45,000. In this case, the whole interest is chargeable to TDS as it exceeds the limit of ₹ 40,000. But if you split your investment in two parts of ₹ 2,25,000 each and deposit into two banks or two branches of the same bank, the interest earned would be same but no TDS would be deductible as it does not crosses the limit.
A point to remember is that you still require filing ITR and showing the income of ₹ 45,000 and if your income is taxable and you have to pay tax according to slab you fall in.
How to get TDS Refund?
In case your tax liability comes NIL but the bank has deducted TDS, you can claim the refund by just filing Income Tax Return. Before claiming tax refund you should first verify the TDS with you Tax Credit Statement aka Form 26AS.