Fixed Deposits (FDs) remain one of the most trusted investment options for Indians seeking safety and guaranteed returns. But while your principal stays secure, the interest you earn is fully taxable. Understanding FD tax benefits and TDS rules can help you plan smarter, avoid unnecessary deductions, and stay compliant while filing your Income Tax Return (ITR). Here’s a complete, updated guide for 2026.
How Is FD Interest Taxed?
Interest earned on a Fixed Deposit is not tax-free. It gets added to your total income under the head “Income from Other Sources” and is taxed as per your applicable income tax slab rate. For example, if you fall in the 30% tax bracket and earn ₹1 lakh as FD interest in a year, you’ll owe ₹30,000 in tax on that interest – regardless of whether TDS was already deducted by the bank.
What Is TDS on FD Interest?
TDS, or Tax Deducted at Source, is the mechanism under which your bank or NBFC deducts tax before crediting FD interest to your account. This is governed under Section 194A of the Income Tax Act (now referenced as Section 393 under the Income Tax Act, 2025). The purpose is simple: collect tax as income is earned, rather than waiting until year-end filing.
When Is TDS Deducted on FD Interest in 2026?
Banks don’t deduct TDS on every FD. It only kicks in once your total interest income from a particular bank crosses a specified threshold within a financial year (1 April to 31 March).
As per the Union Budget 2025, effective from FY 2025-26 onward, the revised TDS thresholds are:
- ₹50,000 per year for regular (non-senior) individual depositors – up from the earlier ₹40,000 limit
- ₹1,00,000 per year for senior citizens (aged 60 and above) – up from ₹50,000
If your total FD interest from a bank stays within these limits, no TDS is deducted. However, once the threshold is crossed, TDS applies to the entire interest amount, not just the excess over the limit.
TDS Rates on FD Interest
- 10% TDS is deducted if your PAN is linked with your bank account
- 20% TDS is deducted if your PAN is missing or not linked – a strong reason to keep your KYC updated
- For NBFC or company fixed deposits, the threshold is much lower at ₹10,000, above which 10% TDS applies
- NRIs face a higher TDS rate of 30% on FD interest, compared to 10% for resident Indians
It’s important to remember that these thresholds apply per bank, not across your total FD holdings. So if you split deposits across multiple banks and each stays under the threshold, TDS may not be deducted anywhere – though the interest is still fully taxable and must be disclosed in your ITR.
How to Avoid or Reduce TDS Legally
- Submit Form 15G or 15H: If your total annual income falls below the taxable limit, submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) at the start of the financial year to prevent TDS deduction.
- Spread deposits across banks: Keeping interest income per bank under the threshold can help avoid TDS, though tax liability remains.
- Keep PAN updated: Always ensure your PAN is linked with your bank to avoid the higher 20% TDS rate.
- Claim TDS while filing ITR: If TDS has already been deducted but your total income is below the taxable slab, you can claim a refund while filing your return.
No TDS Doesn’t Mean No Tax
A common misconception is that if TDS isn’t deducted, the interest is tax-free. That’s incorrect. Even when TDS doesn’t apply, FD interest must still be declared as taxable income in your ITR, and any applicable tax must be paid based on your slab rate.
Final Word
Staying on top of FD tax benefits and TDS rules ensures you’re not caught off guard during tax season. With the 2025 Budget raising thresholds to ₹50,000 (general) and ₹1,00,000 (senior citizens), many small investors now enjoy more breathing room before TDS applies. Still, always cross-check your Form 26AS and AIS to verify TDS deductions, keep your PAN and KYC details updated, and file Form 15G/15H where eligible to make the most of your fixed deposit investments in 2026.
