How to avoid TDS on fixed deposits
Don’t allow the bank or company to deduct tax at source on your fixed deposit, particularly if you're not liable to pay at all. Use one of these three easy ways to avoid TDS.
Fixed deposits (FDs) aren’t tax-efficient investments. All your returns are taxable at the slab rate under the head ‘Income from other sources’ in your IT returns. If you earn over Rs10,000 in interest from a single bank FD or Rs5,000 from a company FD in any financial year, however, tax will be deducted at source at 10.3% (including education cess) on maturity of your investment (this could be 20% in case your PAN is not registered with the bank).
So if you earn Rs15,000 in interest in a given year from a bank FD, Rs1,545 will be deducted at source. Your actual liability (at the end of the year) might be lower or higher, depending on your income and the other deductions you’re entitled to. Particularly if your liability is going to be lower, though, you will not want TDS deducted on your investments. Here’s how you can avoid paying it:
Submit form 15G/15H
Both forms are declarations that you’re not eligible to pay any tax on the interest, even though it exceeds Rs10,000 or Rs5,000, as may be the case. As a result, no tax should be deducted at source. 15H and 15G serve the same purpose, with 15H applying to senior citizens and 15G applying to everyone below 60. The 15H form applies when your total taxable income in a year is expected to be nil. This also applies to the 15G form, though in addition your total interest should not exceed the basic exemption slab. You need to submit the 15H and 15G forms before the first payment of interest from the bank. They should be submited each year, because your tax liability can fluctuate with each passing year.
Instead of investing your savings at the start of the year, wait for the middle of the financial year in case of a year-long FD. This way, interest is split between two financial years. September or October is the perfect time for this.
Divide your investment
If you are liable to pay tax, you can’t submit the above-mentioned forms. What you can do is divide your investment, either between different accounts or across banks, so that no bank can deduct tax on your investment. For this, all you need to do is calculate the tax liability on your entire investment. Then split up your deposits in different banks or even branches so that it does not exceed Rs10,000.