Fixed deposit interest is taxed as income, meaning a 6.40% headline rate can deliver an effective return of about 4.64% for investors in the 30% tax bracket.
Fixed deposit interest in India may look straightforward on paper, but the tax treatment can significantly reduce the return investors actually keep. The interest is taxed as “Income from Other Sources”, whether it is paid out in cash, transferred to a savings account or reinvested into another deposit. Banks also report the interest through tax records such as Form 26AS and the Annual Information Statement, which helps taxpayers match what the lender has reported with what they declare in their return.
For many savers, the more immediate issue is tax deducted at source, or TDS. Banks generally deduct TDS at 10% when total interest from a bank crosses the annual threshold of ₹50,000 for most people or ₹1 lakh for senior citizens. The threshold applies per bank, not per deposit, so interest from multiple fixed deposits with the same institution is added together. If PAN is not provided, the deduction rises to 20%. TDS is not the final tax bill; it is only an advance payment that is later adjusted against the actual liability when the return is filed.
The gap between the quoted deposit rate and the post-tax return can be wide, especially for investors in higher tax brackets. Kuvera’s calculations show that a 5-year deposit yielding 6.40% works out to an effective return of about 4.64% after tax for someone in the 30% bracket. The same product leaves around 5.12% for someone in the 20% bracket and roughly 6.08% for a taxpayer in the 5% slab. In one example, a ₹5 lakh deposit at 6.40% grows to about ₹6,86,822 before tax, but the post-tax proceeds fall to roughly ₹6,29,718 for a person in the 30% bracket.
Senior citizens have a useful relief under Section 80TTB of the Income Tax Act. Official tax material says resident individuals aged 60 or above can claim a deduction of up to ₹50,000 on interest from savings accounts, fixed deposits and recurring deposits, but only under the old tax regime. That means the deduction does not apply to taxpayers who have chosen the newer regime. The law also makes clear that the benefit is restricted to eligible resident senior citizens and does not extend to non-senior taxpayers, companies or other entities. By contrast, the 5-year tax-saving fixed deposit qualifies for a deduction of the amount invested under Section 80C, subject to the overall limit of ₹1.5 lakh, although the interest on that deposit is still taxed in the usual way.
Taxpayers with income below the taxable threshold can seek to avoid unnecessary TDS by submitting Form 15G or Form 15H at the start of the financial year. Form 15G is for people under 60, while Form 15H is for senior citizens. If TDS is deducted anyway, it can be claimed back when the income tax return is filed. For regular depositors, the key takeaway is simple: the headline rate on a fixed deposit is not the same as the return after tax, and the difference can be material over a five-year term, particularly for those in the higher tax slabs.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
