Fixed deposits (FDs) remain a popular choice for investors seeking safety and steady returns. But while they are considered “safe,” experts warn that safety does not necessarily mean tax efficiency.
CA Nitin Kaushik explains that earning 6-7% on an FD can quickly drop below 5% after taxes, depending on your income slab.
Many investors are unaware that FD interest cannot be hidden. It is reflected in your bank statements, Annual Information Statement (AIS), and Form 26AS. Even if you do not withdraw the interest, it is deemed earned annually and must be reported in your income tax return (ITR).
TDS rules for FY 2025-26
Thresholds: TDS applies if FD interest exceeds Rs 50,000 (Rs 1 lakh for seniors).
Rates: Banks deduct 10%, or 20% if no PAN is provided.
Below Threshold: No TDS is deducted, but the interest is still taxable and must be declared.
Non-taxable FD interest is limited to cases where total income falls below the exemption limit or if seniors submit Form 15G/15H. Otherwise, FD interest is always taxable under “Income from Other Sources.”
Old vs New Tax Regime
Old Regime: Under the old tax regime, fixed deposits can offer some relief through available deductions:
Tax Saver FDs: Fixed deposits with a 5-year lock-in period qualify as tax saver FDs. Investments up to ₹1.5 lakh in these FDs can be claimed as a deduction under Section 80C, reducing your taxable income and effectively lowering your tax liability.
Senior Citizens – Section 80TTB: Seniors enjoy an additional deduction on interest earned from deposits under Section 80TTB. Earlier, this deduction was capped at ₹50,000, but from FY 25-26, it has been increased to ₹1 lakh. This allows senior citizens to reduce their taxable income further, making FDs more attractive for retirees.
Principal Redemption: The principal amount you invest in an FD is always tax-free. This means that the amount you deposit is not included in your taxable income, and only the interest earned is subject to taxation.
Overall, the old regime provides avenues for tax planning, especially if you are investing in tax saver FDs or are a senior citizen.
New Regime: The new tax regime, designed to simplify taxation, changes the treatment of FDs significantly:
No 80C or 80TTB Benefits: Under the new regime, there are no deductions for investments in tax saver FDs (Section 80C) or for senior citizen interest exemptions (Section 80TTB). This removes two key shields that previously made FDs partially tax-efficient.
Principal Redemption Remains Tax-Free: Like the old regime, the principal amount remains exempt from tax. You are only taxed on the interest earned.
Interest Fully Taxable: All interest earned on FDs is treated as Income from Other Sources and taxed according to your applicable income slab. While the new regime simplifies filing and reduces compliance, it also makes fixed deposits less tax-efficient, particularly for those in higher income slabs who would have benefited from 80C or 80TTB deductions under the old regime.
Real-Life scenarios
Mr. X (35 years old, FD interest ₹60,000)
Mr. X, a young professional earning FD interest of ₹60,000 in a financial year, illustrates how tax treatment varies under the old and new regimes:
TDS Deduction: The bank automatically deducts ₹6,000 as TDS at 10%, since the interest exceeds the ₹50,000 threshold for non-senior citizens. This reduces the immediate cash he receives from the FD.
Old Regime Advantage: If Mr. X has invested in a tax saver FD with a 5-year lock-in, he can claim a deduction under Section 80C up to ₹1.5 lakh. This lowers his taxable income and reduces his overall tax liability, making the FD more efficient from a tax perspective.
New Regime Scenario: Under the new tax regime, no 80C deductions are available. However, if Mr. X’s total income is ₹7 lakh or below, he may benefit from the rebate under Section 87A, which can offset some of the tax liability. For incomes above this threshold, the new regime offers no additional FD-related relief, potentially making his FD returns less tax-efficient than under the old regime.
Mr. Y (65 years old, FD interest ₹40,000)
Mr. Y, a senior citizen, provides insight into how age and thresholds affect FD taxation:
TDS Threshold: Since his FD interest is Rs 40,000, below the senior citizen threshold of Rs 1 lakh, the bank does not deduct TDS. He receives the full interest amount in hand.
Old Regime Advantage: Seniors can claim the full benefit of Section 80TTB, which allows a deduction of up to ₹50,000 (increased to Rs 1 lakh from FY 25-26) on interest earned from deposits. This significantly reduces or even eliminates tax liability on his FD interest, making the old regime highly advantageous.
New Regime Scenario: Under the new regime, there is no 80TTB deduction, and the FD interest is fully taxable unless Mr. Y’s total income falls below the exemption limit. For many seniors, this makes the new regime less favorable if they rely on FDs as a source of steady income.
These examples highlight that post-tax FD returns can vary widely depending on age, total income, and the tax regime chosen. For younger investors with incomes under ₹7 lakh, the new regime’s Section 87A rebate may offset some taxes, while for seniors, the old regime continues to offer significant advantages through 80TTB.
Key insights
FD interest is taxed at your income slab rate. A 7% FD in the 30% slab can yield just 4.9% after tax, often lower than inflation.
Seniors generally benefit more under the old regime due to 80TTB.
Young earners with total income below ₹7 lakh may save under the new regime’s 87A rebate, but higher earners often fare better with the old regime if using 80C instruments.
Takeaways for investors
FDs are safe, but they are tax-unfriendly. The old regime rewards careful planning, while the new regime is simpler but can be costlier for FD investors. Kaushik advises: don’t just look at the interest rate; always calculate the post-tax yield to understand the real returns.
In today’s scenario, balancing safety with tax efficiency is crucial for ensuring that your money truly grows over time.