Ways to get rid of TDS on fixed deposits

Fixed deposits are a popular investment vehicle allowing investors the safety of their investment with assured returns. Almost every investor irrespective of his or her overall financial health parks some part of his overall investment as fixed deposits. While fixed deposits or FD as they are commonly know offer substantial assured returns, the interest earned through fixed deposits is liable for tax. Tax is often deducted at source for fixed deposits with interest rates of more than Rs. 10, 000 in one financial year. Let us take a look at TDS on fixed deposits and ways to avoid the same.

Understanding TDS on FD Interest: The interest earned for all investments made under fixed deposits is taxable if the overall interest received exceeds the minimum limit of Rs. 10,000 in a financial year. The tax liable for TDS on fixed deposits needs to be filled under income from other sources section while filling the income tax return. Tax deducted at source or TDS for fixed deposits interest is calculated as at 10% plus 3 per cent education cess. The total deduction for DS on fixed deposit interest rates is 10.3 % of the interest earned.

Example of TDS deduction:  If an investor has earned an interest of Rs. 30,000 through fixed deposits inters in one financial year, banks would deduct TDS on interest earned calculated at 10.3 per cent of the interest amount. In this case the banks would deduct a TDS of Rs. 3090 and pay the investor a total of Rs. 26910 as interest earned from his or her fixed deposit earnings. It is imperative to note that the TDS limit for investors parking their funds in any companies' deposit schemes is calculated if the interest earned exceeds the sum of Rs. 5,000 in one financial year.

Ways to Avoid TDS:

·         Spreading Investment across Financial Years: Timing Fixed Deposit investments are a good way to offset any TDS deductions for interest earned. Divide the timing of fixed deposits in such a way that interest for any of the financial years does not exceed the minimum threshold limit of Rs. 10,000. If the sum of interest earned is divided across two financial years, the user is not liable for any TDS.

·         Splitting Fixed Deposit Investments: Rather than having all fixed deposits investments under the same individual one can diversify the investments under a personal bank account, a Hindu Undivided family or in the name of other family members. As an investor with a HUF, the fixed deposits is considered as a separate financial entity therefore the interest earned would not be added to the overall interest earned through FD's for the individual. Similarly opting to open a fixed deposit account in the name of any relatives or spouse is also a good idea considering that the overall interest earned remains below the minimum threshold.

·         Using Form 15G/15H: In case the investor has no taxable income the bank does not deduct any TDS for interest rates higher than Rs. 10,000 for one financial year. The investor needs to submit a declaration in a dedicated format through FORM 15G declaring that his or her overall taxable income is nil. The duly filled form must be submitted with the bank holding the fixed deposit account. In case of a senior citizen, Form 15H needs to be submitted instead of FORM 15G.