A Fixed Deposit is one of the best ways to save money for a long term. It basically involves you keeping a lump sum amount in the best Fixed Deposit schemes you can find and wait till it reaches maturity.
Once you have invested in it, the FD accrues interest overtime and you receive a much higher amount at the end of the term. However, it depends on whether it is a non-cumulative or a cumulative Fixed Deposit. The interest that is generated on the Fixed Deposit may be taxable under income tax laws in India and is deductible as TDS at the end of a financial year.
But before explaining the various ways to avoid TDS, let’s ascertain what the concept is and what it entails.
What is TDS?
The abbreviation of Tax Deduction at Source, TDS is one of the many ways through which banks collect taxes on the income you earn. It’s pretty much like a ‘pay as you earn’ scheme wherein you will pay small amounts to the IT department rather than having to make lump sum payments at the end of each financial year. TDS is not related to the income tax you pay every year as it usually applies on any other financial asset apart from your regular salaries.
What objectives does TDS serve?
TDS was basically introduced by the government to serve a number of objectives. Some of them are:
- To help ease a salaried person’s burden of paying tax in installments
- To collect taxes as and when an individual receives his income
- Help the government run the operations smoothly. Governments basically need money for different projects throughout the year, collecting taxes as early as possible through TDS will help finance those projects
- It also helps increase the taxing reforms and get those who would have otherwise escaped tax payments to pay the taxes
The dos and don’ts of filing TDS
- Make sure to use the same TAN in your TDS against which you have a certificate issued and make payments towards.
- Check if the correct PAN number is mentioned.
- Don’t make the TDS deposit because it attracts way more penalty, which is typically 1.5%
- File discrepancy statements as and when you find any.
- Do not make the mistake of not entering the PAN as it incurs 20% extra TDS.
How to avoid TDS on your Fixed Deposits?
If you are trying to get the best out of your savings and also want to avoid falling under the TDS bracket, use the following tips.
- Diversify your FD over different banks
A few years ago, there was a rule that claimed that if FDs were split across different bank branches and even if the interests from those investments exceeded Rs.10,000 per year, banks wouldn’t deduct any taxes.
However, as banking technology improved and core banking solutions took shape, interests across different branches would be considered as one.
There’s a better option for you to save TDS though. This requires you to carefully divide your deposits across different banks with the help of an efficient FD interest calculator. You need to do this in such a way that the interest from an investment doesn’t go beyond Rs.10,000, which helps you save the tax money.
Note that doing this might only stop the TDS from the bank. You will still need to include the details when you are filing your income tax returns. If you fall under any of the tax slabs, you will still have to pay taxes accordingly. So you need to know all about fixed deposit before investing.
- Submitting forms 15H and 15G
Forms 15H and 15G are basically declarations claiming that you are not eligible to pay any taxes on the interest you are earning, whether it exceeds Rs.10,000 or Rs.5,000.
Both these forms serve the same purpose too. While 15H applies for senior citizens over the age of 6, 15G works for people below 60. The 15H form comes into play when your total taxable income in a year is expected to be zero. The same applies to the 15G form, though your total interest should not go beyond the basic exemption slab.
You will need to submit these forms before the banks provide the first interest on your money. Also, the forms should be submitted each year as your tax situation might fluctuate with time.
Note that if you file false declaration under 15H or 15G, you will either have to pay a penalty or will face imprisonment under Section 270 of the Income Tax Act.
- Invest mid-year
While this doesn’t work entirely for longer FD investments, it does for year-long FDs. Basically, through this, the interest will be split between two financial years, which means even it exceeds Rs.10,000, you can still avoid tax deduction at source.
All in all, if you manage to keep these basic details in mind, and use them as and when needed, you will safely be able to avoid TDS.