Most investors compare FD rates before booking, but rarely consider how tax deductions will change the final payout. The result? What looks like a digital fixed deposit at 7.45% return on paper can shrink noticeably once TDS is deducted, leaving depositors surprised at the maturity stage.
This gap between expected and actual returns is why understanding TDS on fixed deposits is so important. The Union Budget 2025 raised the exemption thresholds, ₹50,000 for individuals and ₹1 lakh for senior citizens, offering welcome relief to small savers. Yet the deductions still apply if interest crosses these limits, unless you’ve planned ahead with the right exemptions.
In this blog, we’ll break down the impact of TDS on FD returns, the new rules that apply from April 2025, and how to use Forms 15G and 15H effectively to ensure your money works exactly the way you expect it to.
Understanding TDS on Fixed Deposits
TDS stands for Tax Deducted at Source. Banks and post offices are required to deduct tax on FD interest once it crosses a prescribed threshold in a financial year. The rate is 10% if you’ve submitted your PAN and 20% if you haven’t.
It’s important to understand that TDS is not an additional tax. It’s simply an advance collection of income tax against your interest income. If your total taxable income is below the exemption limit, or if your actual liability is less than the tax already deducted, you can claim a refund while filing your Income Tax Return (ITR).
TDS thus affects cash flow more than overall tax liability — the deduction reduces liquidity mid-year, even if you’re eventually entitled to a refund.
TDS Rules on FD Interest
The Finance Minister, in the Union Budget 2025, revised TDS thresholds to ease the burden on small depositors:
- For individuals below 60 years: The annual TDS on FD interest threshold has been increased from ₹40,000 to ₹50,000.
- For senior citizens (60+ years): The threshold has been doubled from ₹50,000 to ₹1,00,000 per year.
This reform applies to TDS on FD interest earned across banks and post offices. The move was introduced to align TDS obligations with the real income needs of households, ensuring small savers are not forced into refund cycles.
Impact of TDS on FD Returns
The biggest concern with TDS is its effect on effective returns. Consider this example:
A ₹6 lakh FD at 7.95% can generate approx. ₹47000 in annual interest. Under the old rules (threshold ₹40,000), TDS would have applied.
With the new threshold of ₹50,000, no TDS is deducted — meaning you keep the full ₹45,000 until final tax settlement.
A ₹12 lakh in Fixed Deposit for senior citizens at 7.95% yields ₹96,000 annually. Previously, this would have crossed the ₹50,000 cap, and TDS would apply. Under the revised ₹1,00,000 threshold, there is no deduction, preserving liquidity.
However, remember: TDS avoidance does not mean tax exemption. If your total income (including FD interest) exceeds the basic exemption limit, you must still pay income tax. The only difference is whether tax is deducted upfront or adjusted later during return filing.
How to Apply for Exemption of TDS on FD Returns
If your income is below the taxable threshold, you can prevent TDS deductions altogether by submitting self-declaration forms to your bank:
- Form 15G: For individuals (below 60) and certain entities whose total income is below the taxable limit
- Form 15H: Exclusively for senior citizens with income below the taxable limit
When and how to submit:
- Submit at the start of the financial year to each bank or post office branch where you hold FDs
- Ensure details are accurate and consistent with your PAN and Aadhaar
- If you miss the deadline and TDS is deducted, you can still claim a refund via ITR
Important: Submitting these forms incorrectly — when your income is actually taxable — is considered misrepresentation and may attract penalties.
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Practical Tips for FD Investors
- Spread deposits wisely: Splitting across banks may help keep interest below thresholds
- Quote PAN: Always update PAN details to avoid 20% deduction.
- Track TDS: Check Form 26AS or AIS regularly to monitor deductions
- Cumulative vs. non-cumulative: Choose depending on liquidity needs; cumulative FDs may cross thresholds faster
- Maintain liquidity: Never exhaust emergency funds solely for higher FD bookings
Final Thoughts
The 2025 update to TDS rules on fixed deposits is a relief for crores of small depositors, especially senior citizens. By raising thresholds to ₹50,000 and ₹1,00,000 respectively, the government has ensured that only significant interest incomes face upfront deductions.
That said, TDS is only about timing — not the final tax bill. If your income is taxable, you must still account for it. The smart approach is to use Forms 15G and 15H responsibly, plan FD investments across institutions, and align them with your overall financial goals.
