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How To Save Tax On FD Interest?

mahindra-finance-author

by Mahindra Finance

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March 5, 2024

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5 mins read

Are you looking for ways to save tax on FD interest? You're not alone. Many individuals are eager to reduce their tax liabilities and maximise their savings. In this guide, we will explore practical strategies that can help you save tax on FD interest and other tax-saving fixed deposits. Saving tax on FD interest requires a combination of smart planning and understanding the details of taxation laws. 

1. Save tax on FD interest: Utilise form 15G/15H

One of the first steps to saving tax on FD interest is by utilising Form 15G or Form 15H. If your total income falls below the taxable limit, you can submit Form 15G if you're below 60 years of age or Form 15H if you're a senior citizen (above 60 years). These forms declare your non-taxable status and prevent the bank from deducting TDS (Tax Deducted at Source) on your FD interest.

2. Distribute FDs across banks to save tax on FD interest

If you are searching for tax-saving fixed deposits, then another effective strategy to save tax on FD interest is by distributing your FD investments across different banks. The Indian Income Tax Act mandates that TDS should be deducted only if the interest accrued on your FDs exceeds ₹40,000 in a fiscal year. However, FD for senior citizens, this limit is set at ₹50,000.Let's understand this with an example. Suppose Mrs Verma has deposited a total of ₹8 Lakhs in various FDs across multiple banks. Each FD earns her an annual interest of 8%, resulting in ₹64,000 as interest income per year. By distributing her FD investments across different banks, she can ensure that the interest earned by each bank remains below the threshold limit of ₹50,000 for senior citizens. This way, she can avoid TDS deductions and tax exemption on FD interest.

3. Timing your FD investments helps to save tax on FD interest

For people looking for a tax-saving fixed deposit, timing their FD investments strategically can also help to save tax on the interest earned. Consider opening a 1-year fixed deposit in September instead of April to split the interest earned across two financial years.

Let's take an example to understand this better. Mr. Patel decides to invest ₹1 Lakh in an FD for 1 year at an annual interest rate of 7%. If he invests in April, he will earn ₹7,000 as interest within that financial year and another ₹7,000 as interest in the subsequent financial year before maturity. However, if he chooses to invest in September instead, he will earn only ₹3,500 as interest within that financial year and another ₹10,500 as interest in the subsequent financial year before maturity. By timing his investment strategically, Mr Patel can potentially keep his overall interest earnings below the TDS deduction limits and save tax on his FD interest. This way he can enjoy tax exemption on FD interest.

4. Split FDs between accounts to save tax on FD interest

Consider opening FDs under different account types, such as a personal account and a Hindu Undivided Family (HUF) account. This can help you compartmentalise the interest earned and reduce the tax implications.

For instance, let's say Mr Khan has invested ₹5 Lakhs in an FD under his account and another ₹5 Lakhs in an FD under his HUF account. Each FD earns him an annual interest of 6%, resulting in ₹30,000 as interest income per year from each account. By splitting his investments between two accounts, he can ensure that the interest earned from each account remains below the taxable limit. This way, he can save tax on his FD interest by reducing his overall tax liability.

Conclusion

Saving tax on FD interest is an important consideration for many individuals, particularly those living in rural and semi-urban areas of India. By utilizing strategies such as Form 15G/15H, distributing FDs across banks, timing your investments, and splitting FDs between accounts, you can potentially minimise the impact of taxes on your FD interest earnings.

While these strategies can help you save tax on FD interest, it's essential to consult with a financial advisor or tax professional to understand the nuances of taxation laws and ensure compliance. Additionally, consider exploring financial products offered by trustworthy institutions like Mahindra Finance that provide tailored solutions for individuals looking to maximise their savings while minimising their tax liabilities.

FAQs

Q: Can I save tax on fixed deposits if my income is below the taxable limit?

A: Yes, if your total income falls below the taxable limit, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to avoid TDS deductions on your fixed deposit interest.

Q: What is the benefit of timing my FD investments strategically?

A: Timing your FD investments strategically, such as opening an FD in September instead of April, allows you to split the interest earned across two financial years, potentially keeping it below the TDS deduction limits.

Q: Can opening FDs under different account types help me save tax on FD interest?

A: Yes, opening FDs under different account types, such as a personal account and a Hindu Undivided Family (HUF) account, can compartmentalise the interest earned and reduce tax implications.

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