A fixed deposit is a financial instrument wherein you deposit a fixed sum of money at a predetermined rate of interest, payable at maturity. It is a favourite option among investors not only from a returns point of view, but also as a tax saving measure. So, the motive behind investing in a Fixed Deposit is to gain a high return on the funds invested, as well as to minimise your tax liability.

             
While FD investment offers you a deduction under 80C (the precondition is that it has to be a long-term FD), the interest you earn on your Fixed Deposit is taxable. This interest is taxable under the head “Income from other sources” while calculating your gross total income.

Under the provisions of the Income Tax Act, the bank has to deduct tax at source (TDS) if the interest you receive annually is more than Rs.10,000. If you hold company Fixed Deposits, you will be liable for TDS if the interest earned is more than Rs.5,000. When you have to pay TDS at 10%, it cuts into the interest that you receive, which ends up being less than the amount printed on your FD receipt.

You probably hold Fixed Deposits with various banks, so you know that the FD rate of interest varies among banks. The interest rate also varies according to the tenure. As an investor, you want the real rate of return on your Fixed Deposit to be high. This can be achieved by employing the following tips.

Splitting your Investments

                                             
The most efficient tip by which you can avoid TDS on FD interest in by splitting your investment into multiple FD’s. Instead of holding a single lump sum FD with one bank, you can open multiple FDs with various banks so that the interest earned from one bank does not exceed the taxable limit.

For example, if you open a Rs.1.1 lakh FD with one bank, which fetches you 10% interest, your annual interest earned will be Rs.11,000. This makes you liable for TDS as the interest received is above the threshold limit.

Instead, if you split the total amount into 4 FDs each of Rs.20,000 and 1 FD of Rs.10,000, with 3 different banks, then your interest earned from each bank will be less than Rs.10,000, which keeps you out of TDS territory.

Submit Form 15H/15G

It is easy to calculate how much interest you will earn with a fixed deposit interest calculator. If you do not have any taxable income, you can submit Form 15H to make sure that the bank does not deduct TDS. In case you’re a senior citizen, you’ll need to submit form 15G at the beginning of each financial year.

Time your FD investment
                         
Open a Fixed Deposit such that the interest which accrues over the financial year is below the taxable limit.

Fixed Deposits are great investment options and can earn you good returns. Investing with some planning ensures that the real return on your FDs is as high as possible.