Thursday, 6 August 2015

4 Tips to Avoid / Reduce TDS on Your Fixed Deposits / FDs

Posted by MyInvestmentsPub
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 currently, the attractiveness of fixed deposits is set to grow in the future. However, Banks will deduct TDS (Tax Deducted at Source) at 10% if the interest amount earned on your FD exceeds Rs 10,000 in a FY. This TDS will impact on your maturity amount. So, many of us wanting to save this TDS amount. But how we can avoid or reduce TDS on FD? What are the tips we need to follow to save the TDS amount?

Types of FD schemes available in the Market:

Because of the new entries in the current Banking sector, there is huge competition among banks to attract the FDs from the public. To lure the Depositors, Banks are coming with innovative FD products. There are many varieties of FD schemes available in the market today, and Depositor can pick one depending on his need and suitability. Let us take a look at the various types of FDs available today:

Normal FD Scheme: 

As all we know, in the Normal FD scheme, the tenure is fixed for a period ranging 1 week to 10 years. The interest rate of each period is pre-determined and fixed, and an investor can choose to stay invested for a suitable period.

Tax saving FD Scheme: 

This is also like Normal FD, however the lock-in period is 5 years. This type of FD scheme attracts investors who want to invest for saving income tax. There is a compulsory lock-in of five years under this type, and the fund cannot be withdrawn before completion of the period.

Special FD Scheme: 

Some times, Banks will come up with Special FD schemes with a special lock-in period. In special tenure FD schemes, the fund can be invested for a special period like 333, 399 or 555 days, and rate of interest is higher compared to Normal FD scheme.

RD scheme: 

This also one of the popular FD scheme. Under Recurring deposit (RD) scheme, an investor can regularly deposit a fixed amount every month for a fixed tenure and at a pre-decided interest rate. The corpus keeps on growing every month towards the maturity period. This scheme is best suitable for any short-term financial goal.

Floating FD Scheme: 

This is one of the new innovative FD scheme to attract Fixed deposits from the customers. 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. If the interest rates are climbing, this scheme would yield more interest to the customer.

Points to Remember Before Opting for FD:

  1. Lock-in Period: You should define your lock-in period before starting an FD with the bank. Some times, Banks will introduce special lock-in periods to yield more interest. Check with the Banks for any such special Lock-in periods.
  2. Interest calculation: You should know how the interests are calculated. Generally we have monthly, quarterly, half-yearly and yearly calculations are available under different conditions.
  3. Interest payout: Do you need regular interest payouts every month or quarter? Otherwise, you can also have the option to reinvest the interest earned and increase the FD corpus. 
  4. Pre-Maturity Penalties: Generally Banks charges 1% - 2% penalties on pre-maturity of your FD. However, some banks will not impose any such penalties for some FD schemes. You need to enquire such Banks and schemes.
  5. Customer Service: This is also an important factor before starting an FD with the Bank. Enquire about the customer service facilities such as Online tracking of your FD, Customer Service contact, Report generations etc.

New Amendments on TDS from Budget 2015:

  1. The bank or the post office  deducts tax while crediting the interest in case the interest being credited or likely to be credited exceeds Rs. 10,000/- in a year. 
  2. In case of other payers the TDS provisions get triggered on crossing the limit of Rs. 5,000/- Presently the limits of Rs. 10,000/- and 5,000/- are calculated with reference each of the branch and not all the branches together.
  3. The budget proposes to make  this limit for tax deduction applicable in respect of deposits with all the branches taken together in case the bank or the Company has core banking solution. 
  4. So now you cannot escape the clutches of TDS even if you open your bank fixed deposits with different branches of the same bank in case the aggregate of the interest on all the deposits is likely to exceed the threshold limit as above as almost all the banks now have core banking solution. 
  5. Moreover till now some of the cooperative banks were not deducting tax on interest on fixed deposits from members. The present budget proposes to make the interest credited by the cooperative banks to their members also subject to TDS.   
  6. One more changes which will affect you all in the TDS sphere is that presently the interest on recurring deposit (RD)  are not subject to TDS. The budget proposes to apply the TDS law to interest on recurring accounts also.   

Tips to Avoid / Reduce TDS on FDs:

Using the following Tips, a Depositor can save the TDS on FD. However, please note that this tips are to just avoid or reduce your TDS. You still need to include this interest amount earned on FD while filling your income tax returns for that FY. You need to pay taxes according to your income tax slab.

1. 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. Depositor needs to fill this form at the beginning of each FY to avoid TDS.

2. Splitting FD across Banks: 

Another Way To Avoid The TDS Is By Splitting The FD across Banks. In Such A Way That Interest Earned From Any Of The FD Does Not Exceed The Rs 10000 Limits. As I mentioned earlier, under new tax rules, TDS will be deducted if you open your FD with different branches of the same bank in case the aggregate of the interest on all the deposits is likely to exceed the threshold limit.

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 year does not exceed Rs 10000. Suppose, if you invest Rs 2 Lakhs in FD for 1 year on 1-Apr-2015, then the total interest earned that FY would be Rs. 20,000 and TDS will be applied. If you invest this 2 Lakhs amount in Oct-2015, then the interest will be split into 2 financial years (Oct 2015 - Mar 2016 & Apr 2016 - Sep 2016) and there will be no TDS.

4. Splitting FD Another Way: 

This is another way of splitting FD to save TDS. 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 2 heads.

Latest Interest Rates on FDs from Different Banks: 


Because of the safety and liquidity, FDs are an All-Time Favorite Financial Investment Instrument to many investors. Using the above tips you can avoid or reduce your TDS on FDs.  But, you should remember that you still need to include this interest amount earned on FD while filling your income tax returns for that FY. You need to pay taxes according to your income tax slab. 


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