Tax on FD interest in India and legal ways to reduce it

Why FD interest hurts more than it looks

A fixed deposit advertises a headline rate. What you keep is that rate multiplied by what is left after tax, and the tax is not flat. FD interest has no special treatment: it is added to your income and taxed at your marginal slab rate, plus 4% cess.

An illustration with assumed numbers. You put ₹10 lakh in an FD at an assumed 7%, earning ₹70,000 in a year.

The new-regime slabs for FY 2026-27 run 5%, 10%, 15%, 20%, 25% and 30% in ₹4 lakh bands above ₹4 lakh. At 30%, a 7% FD behaves like a 4.8% investment. Compare that with inflation in our inflation calculator before you call it safe. The FD calculator shows the pre-tax maturity amount.

Two further points. Interest on a cumulative FD is taxed every year as it accrues, even though you receive nothing until maturity. And TDS (10% above ₹50,000 a year at one bank, ₹1 lakh for seniors) is only a prepayment, not the final tax; see TDS on FD interest and Form 15G/15H.

Option 1: make use of the allowances

If you are in the old regime:

• Section 80TTA allows up to ₹10,000 of savings account interest (not FD interest) for people below 60.
• Section 80TTB allows senior citizens up to ₹50,000 of interest from savings accounts, FDs and recurring deposits, in place of 80TTA.

Neither is available under the new regime, which is the default. Check which regime wins for you in the old vs new regime calculator. A pure interest earner with low income often pays nothing in the new regime anyway, thanks to the rebate in section 87A.

Option 2: claim it back when your tax is nil

If your total tax for the year is nil, ask the bank not to deduct TDS by giving a declaration (Form 15G or 15H, replaced by Form 121 from 1 April 2026). If TDS was deducted anyway, claim a refund when you file. Do not skip reporting: the income still goes in the return.

Option 3: spread across the family, carefully

Several people in a family may have different slabs. A retired parent with no other income can earn FD interest at a low or nil tax rate, which is why many families place deposits in a parent's name using the parent's own money. But gifting money to your spouse or minor child so they earn the interest does not work: the income is clubbed with yours. See clubbing of income. A gift to an adult child or a parent is not clubbed, subject to the conditions there.

Option 4: use products taxed differently

None of these beats an FD for everyone. They simply have a different tax and risk profile:

• PPF interest is exempt, with a ₹1.5 lakh annual contribution limit and a 15-year lock-in. See our PPF guide.
• Sukanya Samriddhi Yojana interest is exempt as well, for a girl child's account; see our SSY guide.
• Senior Citizens' Savings Scheme pays interest that is taxable, so it does not reduce tax, though the rate may be better than an FD; see SCSS vs mutual funds and the India Post site for the scheme terms.
• Debt mutual funds bought on or after 1 April 2023 are taxed at your slab on redemption, as with FD interest, but the tax is due only when you redeem, which defers it. See FD vs debt fund and our guide to debt funds.
• Arbitrage funds are taxed as equity funds, so gains are taxed at 20% (short-term) or 12.5% above ₹1.25 lakh (long-term), which can beat a 30% slab for money you will hold over a year. Read our guide to arbitrage funds. Returns vary and are not guaranteed.

Always compare the post-tax return, the risk and the liquidity. A debt fund carries credit and interest-rate risk, which a bank FD does not (apart from deposit insurance limits).

Option 5: stagger and plan

An FD ladder keeps part of your money maturing at different times; our post on building an FD ladder covers liquidity, though it does not change the tax rate. What helps is choosing the product, since tax on an FD arrives every year as interest accrues.

A short checklist

1. Add up the interest from every bank and post office account; AIS shows it (see Form 26AS, AIS and TIS).
2. Work out your marginal slab, including the rebate.
3. Check the post-tax return of the FD against the alternatives.
4. Use the allowances and nil-tax declarations if they apply.
5. Do not shift income by gifts that get clubbed.

The Income Tax Department's portal carries the current provisions.

Do the post-tax comparison

Pre-tax numbers are easy to compare and misleading. Take a 7% FD and a PPF assumed at 7.1%, held by someone in the 30% slab. The FD leaves about 4.8% after tax and cess; the PPF's interest is exempt, so it keeps its full rate, though its contribution is capped at ₹1.5 lakh a year and locked for 15 years. For a person in the 5% slab, the gap is small: 6.6% against 7.1%. That is why the right answer changes with income, and why a single rule such as "avoid FDs" is wrong. The PPF rate is reviewed every quarter by the government, so the 7.1% here is an assumption for the arithmetic, not a current rate.

If you are close to retirement, do the exercise for next year's income too. A retiree whose salary has stopped may move into a lower slab, and the same FD then costs far less in tax. Wait before locking a long deposit purely for the headline rate, and re-run the calculation each year with the income tax calculator rather than assuming this year's slab will repeat.

This article is for education only and is not tax advice. Tax rules, limits and rates change; verify current figures on incometax.gov.in or with a qualified professional before you act.