First-Time FD Investors, Be Careful: Understand Tax Rules Before Investing

First-Time FD Investor:
Fixed Deposits (FDs) are one of the most popular and trusted investment options among Indian savers because of their safety, fixed returns, and flexible tenure. However, first-time investors must clearly understand the income tax rules linked to FD investments, as even a small mistake can lead to unnecessary tax deductions or an income tax notice.

Minimum Deposit and Tenure

FD rules vary slightly from bank to bank, but most institutions allow deposits starting from ₹1,000 to ₹10,000.
The investment tenure can range from 7 days to 10 years.

If the FD is withdrawn before maturity, banks may:

Charge a penalty

Reduce the interest rate

Deny interest benefits depending on terms

Senior citizens generally receive higher interest rates, making FDs a preferred option for retirees.

Tax Rules for FD Interest

FD interest income is fully taxable and falls under the “Income from Other Sources” category.
Tax is calculated according to the investor’s applicable income tax slab.

If annual interest crosses:

₹40,000 for regular individuals

₹50,000 for senior citizens

then the bank deducts Tax Deducted at Source (TDS).

For tax-saving FDs, investors can claim deductions under Section 80C (up to ₹1.5 lakh), but these come with a mandatory 5-year lock-in period.

Submit Form 15G/15H to Avoid TDS

If your total taxable income is below the exemption limit, you can prevent TDS by submitting:

Form 15G → For individuals below 60 years

Form 15H → For senior citizens (60+)

These forms must be submitted before interest is credited.

PAN Not Linked? TDS Rate Doubles

If the FD account does not have a PAN linked, banks will deduct 20% TDS instead of the standard 10%, as per Section 194A of the Income Tax Act.

So updating PAN before opening an FD is essential.

FD Interest Must Be Reported in ITR

Many investors assume that if TDS has already been deducted, they don’t need to report FD interest in their Income Tax Return — but this is incorrect.

The interest earned must be disclosed in the ITR, regardless of whether TDS was deducted. Non-disclosure can result in scrutiny or tax notices.