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how to avoid tds on fd

How to Avoid TDS on FD: Strategies for Maximizing Returns and Minimizing Tax Liability

Fixed Deposits (FDs) have always been a popular investment option for Indian investors. However, one cannot ignore the tax liability on the interest earned from FDs. Tax Deducted at Source (TDS) is applicable on FDs if the annual interest earnings exceed Rs. 40,000 for regular citizens and Rs. 50,000 for senior citizens. In this article, we will discuss various strategies to avoid TDS on FDs and maximize returns while minimizing tax liability.

Avoiding TDS (Tax Deducted at Source) on FD (Fixed Deposit) requires strategic planning. One method is to distribute your investments across multiple banks to keep the interest earned below the taxable threshold. Alternatively, consider how to avoid TDS on FD by investing in Tax-Saving FDs or Senior Citizen FDs, which offer exemptions or reduced TDS rates. Timing your withdrawals strategically, such as spreading them across different financial years, can also help minimize TDS deductions. Always consult a tax advisor for personalized strategies based on your financial situation.

1. Opt for a Cumulative FD

The interest earned on a cumulative FD is paid at the time of maturity along with the principal amount. This ensures that the investor does not have to pay tax on interest earned every year. For instance, if an investor invests Rs. 1 lakh in a 5-year cumulative FD with an interest rate of 6%, the investor will earn Rs. 33,903 on maturity. Since the interest is paid at maturity, the investor can avoid TDS on FD.

2. Split Your FDs Across Different Banks

TDS is applicable on each FD in a bank if the interest earned exceeds the prescribed limits. An investor can avoid TDS on FD by splitting the investment across different banks. This way, interest earned on each FD will not exceed the prescribed limit and thus, the investor can avoid TDS.

3. Submit Form 15G/15H

Form 15G/15H is a self-declaration form that is used to declare that the investor’s total income is below the taxable limit. If an investor’s income is below the taxable limit after considering all sources of income, then the investor can submit Form 15G/15H to the bank to avoid TDS on FD. The Form needs to be submitted every financial year.

4. Invest in Tax-Saving FDs

Tax-Saving FDs are an excellent option for individuals who want to save tax and earn interest on their investment. These FDs come with a lock-in period of 5 years and offer tax benefits under Section 80C of the Income Tax Act. The investment limit in tax-saving FDs is Rs. 1.5 lakhs per financial year. By investing in tax-saving FDs, an investor can avoid TDS on FD and save tax too.

5. Invest in FDs through a family member

An investor can consider investing through a family member to avoid TDS on FD. For instance, if a senior citizen invests in an FD and earns interest, it is taxable if it exceeds Rs. 50,000. However, if the investment is made in the name of the spouse who is a non-senior citizen and their income is below the taxable limit, then Form 15G/15H can be submitted to avoid TDS on FD.

6. Select Non-Taxable FDs

Certain types of FDs issued by specific banks are not subject to TDS. For instance, an investor can consider investing in the Senior Citizen Savings Scheme (SCSS), which is not subject to TDS. The interest earned is taxable, but the investor can submit Form 15G/15H if the total income is below the taxable limit.

7. Consider investing in Corporate FDs

Corporate FDs often offer a higher interest rate than bank FDs and often have lower TDS rates. The investor can opt for a non-cumulative FD to earn monthly, quarterly, or half-yearly interest income. The investment in Corporate FDs is riskier than bank FDs, and the investor must evaluate the risk-return before investing.

FD interest rates for senior citizens are a critical consideration for retirees and those nearing retirement. Banks often offer special rates tailored to meet the needs of senior citizens, providing them with higher returns on their fixed deposits. These enhanced rates serve as a valuable source of income during retirement, helping seniors maintain their financial independence and meet their expenses comfortably. By taking advantage of FD interest rates designed specifically for senior citizens, retirees can ensure that their savings continue to grow steadily while enjoying peace of mind knowing that their financial future is secure.

Summary:

Fixed Deposits (FDs) are one of the most popular investment options for Indian investors. However, one cannot ignore the tax liability on interest earned from FDs. Tax Deducted at Source (TDS) on FDs is applicable when the interest earnings exceed Rs. 40,000 for regular citizens and Rs. 50,000 for senior citizens. To avoid TDS on FDs, an investor can opt for cumulative FDs or split FDs across different banks. One can also submit Form 15G/15H, invest in tax-saving FDs or invest in FDs through a family member to avoid TDS on FDs. One can also consider non-taxable FDs or invest in Corporate FDs. The most appropriate strategy to avoid TDS on FDs should be chosen based on one’s financial goals, risk appetite, and tax liabilities. Investors must exercise caution and seek professional advice before investing in the Indian financial markets.

Conclusion

TDS on FD can significantly affect an investor’s returns, and the strategies discussed here can help investors avoid TDS on interest earned from FDs, thereby maximizing their returns. An investor should carefully evaluate their financial goals, risk appetite, and tax liabilities before investing in fixed deposits and choose the most appropriate strategy to avoid TDS on FD. Always remember, investing in the Indian financial markets is subject to various risks and costs, and investors are advised to exercise caution and seek professional advice before investing.

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