Fixed deposits (FDs) are an attractive investment option for individuals looking to grow their wealth through wealth creation and retirement planning. Although FDs offer fixed and guaranteed returns, they come with a caveat – TDS (Tax Deducted at Source). Many investors fail to calculate the impact of TDS and end up with lower returns than expected.
TDS is a tax deducted by the government at the time of interest payment. Under Section 194A of the Income Tax Act, TDS on FD is levied at a rate of 10% if the best fd interest rates payout exceeds Rs. 5,000 in a financial year. The TDS amount is deducted by the bank before paying the interest to the investor. Therefore, it becomes essential to understand how to avoid TDS on FD while maximizing returns and minimizing tax liability.
Here are some strategies that investors can follow to avoid TDS and make the most of their FD investments:
1. Select the Interest Payout Frequency
The frequency of FD interest payouts determines the impact of TDS on the investor’s returns. The interest payout options typically include monthly, quarterly, semi-annually, and annually. If the investor opts for monthly or quarterly payouts, the interest paid out may not exceed Rs. 5,000 in a financial year, thereby preventing the deduction of TDS. Conversely, if the investor opts for semi-annual or annual payouts, the accumulated interest may cross the Rs. 5,000 threshold and attract TDS.
2. Opt for a Tax-Saver Fixed Deposit
Investors can explore the option of investing in tax-saver FDs to avoid TDS on interest income. Tax-saver FDs come with a lock-in period of five years, during which the investor cannot withdraw the funds. However, the interest earned on these FDs is tax-free up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Therefore, investors can avoid TDS on interest paid from tax-saver FDs while saving taxes on the investment.
3. Split the Investment Amount Across Banks
Another strategy to avoid TDS on FD is to split the investment amount across multiple banks. As per the TDS rules, if the interest income from a single bank exceeds Rs. 10,000 in a financial year, TDS is levied. Therefore, by splitting the investment amount across different banks, investors can prevent the interest income from exceeding the TDS threshold and avoid the deduction of TDS.
4. Submit Form 15G/15H
Form 15G/15H is a declaration form provided by the Income Tax Department, allowing investors to avoid TDS on interest earned from FDs. Form 15G is applicable for investors under the age of 60, while Form 15H is for those above 60 years. Investors with a total income of less than the taxable limit can submit Form 15G/15H to the bank to inform them not to deduct TDS from the interest income.
5. Invest in Corporate FDs
Investors can also explore the option of investing in Corporate FDs to avoid TDS on interest income. Corporate FDs are FDs offered by corporations and non-banking finance companies (NBFCs). The TDS rules apply to bank FDs only, and not to Corporate FDs. Therefore, by investing in Corporate FDs, investors can avoid the deduction of TDS and maximize their returns.
6. Invest in Tax-Free Bonds
Tax-free bonds are another investment option that provides tax-free returns to investors. The interest earned on tax-free bonds is free from income tax, making it an attractive investment option for individuals looking to avoid TDS on FDs. Some of the popular tax-free bonds in India include National Highways Authority of India (NHAI) Bonds, Indian Railway Finance Corporation (IRFC) Bonds, and Housing and Urban Development Corporation (HUDCO) Bonds.
It is essential to note that the above strategies can help investors avoid TDS on FDs while maximizing returns and minimizing tax liability. However, investors must also consider the pros and cons of trading in the Indian financial market and assess the investment risk associated with each investment option. It is advisable to consult a financial advisor before making any investment decisions.
To understand the impact of TDS on FD returns, let us consider an example. Suppose Mr. A invests Rs. 5 lakh in an FD with an annual interest rate of 6% for five years. He opts for monthly interest payouts. The total interest earned by Mr. A in the first year is Rs. 30,000, which is less than the TDS threshold of Rs. 5,000 per annum. Therefore, TDS is not applicable, and Mr. A receives the full interest amount. However, if Mr. A had opted for an annual interest payout, the total interest earned would have been Rs. 33,021, crossing the TDS threshold, and TDS of Rs. 3,302 would have been deducted from the interest payout.
In conclusion, TDS on FDs can significantly impact the returns earned by investors. However, by following the above strategies, investors can avoid TDS on FDs while maximizing returns and minimizing tax liability. Investors should also assess the investment option risk associated with each investment option and take a balanced approach towards investing.
Summary:
TDS (Tax Deducted at Source) can significantly impact returns earned through fixed deposits (FDs). Investors can avoid TDS on FDs by selecting the frequency of interest payouts, investing in tax-saver FDs, splitting the investment amount across banks, submitting Form 15G/15H, investing in Corporate FDs, and tax-free bonds. It is essential to assess the investment risk and consult a financial advisor before making any investment decisions. By following the above strategies, investors can maximize returns and minimize tax liability.
