TDS on FD interest, and how to avoid it legally

Banks don’t withhold tax on every fixed deposit’s interest — only once a single financial year’s interest at that bank crosses a fixed threshold. Knowing exactly how that threshold is checked, and what to do before and after it’s crossed, is the difference between losing 10% of the interest upfront and never having it withheld at all.

The threshold, and why it’s checked every year, not once

TDS applies once a single financial year’s interest from one bank exceeds ₹50,000 — ₹1,00,000 for senior citizens — deducted at 10% with PAN on file. The important detail is annual: it’s checked fresh every financial year against that year’s interest alone, not against the total interest the deposit will eventually earn over its whole tenure.

This applies to cumulative deposits too, even though nothing is actually paid out until maturity — banks withhold TDS on the interest that accrueseach year, not just interest that’s physically handed over. A ₹10,00,000 cumulative deposit at the same rate accrues roughly ₹71,859 in its first year alone (interest compounding on top of the growing balance), so TDS is withheld from that year’s accrual regardless of the fact that the depositor won’t see any of the money until the FD matures.

The threshold is also checked per bank, aggregated across every FD a depositor holds there — splitting one large deposit into several smaller ones at the same bank doesn’t avoid TDS, since the bank totals the interest across all of them. Spreading deposits across genuinely different banks does work, though, since each bank only checks the threshold against the interest it itself pays.

Form 15G and 15H: stopping the deduction before it happens

Form 15G (for depositors under 60) and Form 15H (for senior citizens) are self-declarations submitted to the bank stating that the depositor’s total income for the year won’t actually be taxable — and once accepted, the bank stops withholding TDS on that account entirely, regardless of how large the interest gets. Form 15H’s condition is more lenient: a senior citizen can file it as long as their final computed tax liability for the year is nil, even if their gross income is above the basic exemption limit, since rebates and deductions can still bring the actual tax owed down to zero.

If TDS was already deducted, it’s not the final word

TDS is a provisional withholding against an estimated liability, not the actual tax computation itself. If a depositor’s real total income for the year turns out to be below the taxable threshold, or their actual marginal rate is lower than 10%, the excess withheld isn’t lost. It gets claimed back by filing an income tax return and setting the TDS already deducted against the actual tax computed, with any excess refunded. This works whether or not Form 15G/15H was filed in time; the form only prevents the deduction from happening in the first place, it doesn’t change what’s ultimately owed.