Saturday, June 4, 2016

3 Ways to avoid TDS on Bank Fixed Deposit

One of the bad thing about Fixed deposits are TDS i.e. tax deducted at source. If you don't pay attention to TDS or doesn't do enough to prevent or avoid TDS, you could lose a good amount of your interest income to banks. I have many friends who never care about TDS, they think that their bank fixed deposits are getting good interest at least 8.5% per annum, only to find out that interest earned is also taxed at the rate of 20% as TDS due to not furnishing PAN details.


My NRI friends are also in the same boat by losing their hard earned money on NRO fixed deposit to TDS @ 30.9% to the government. Yes, you can reclaim the TDS by filing your income tax returns, but it usually takes at least a year before you get your money back. If you are losing around 1,00,000 rupee in TDS then you could have potentially earned additional 10K during the year TDS remained with the government, that's why it's very important to take measures to avoid or prevent TDS deduction on bank fixed deposits



How to avoid TDS on Fixed Deposit with Banks

One year back my preferred option to avoid TDS on bank fixed deposit was opening FDs at different branches of the same bank. Since all the branch has interconnected, it's easy to open an FD on any branch of private banks e.g. Axis bank, ICICI bank, and HDFC bank by just sitting on your home at the convenience of online banking. 



Earlier due to 10K limit on interest earned, which triggers TDS deduction was on per branch basis, you could have avoided TDS by carefully splitting your FD across multiple branches, but it's not possible now due to a change in budget 2015


From 2015 onwards, that 10K limit is per bank basis, which means if your bank has core banking facility then all fixed deposit across braches are clubbed together to check if interest earned is more than 10K or not if its more than 10K then interest earned on FDs are subject to TDS deduction. Now, since we don't have that option left with us, let's see the other 3 ways to avoid TDS on bank FDs.


1. By submitting Form 15G/15H
If an investor submits Form 15G stating that he has no taxable income, the bank would not deduct any TDS on the interest earned. For senior citizens, the requisite form to avoid TDS is 15H.


2. Distributing FD investment in multiple banks
Another way to avoid TDS is by splitting the deposit into separate banks in such a way that interest earned from any of the FDs does not exceed the Rs 10,000 limit. This is not very convenient because first opening and managing multiple bank accounts is no fun and second it's not scalable. 


3. Timing the FD
You can also save TDS by timing your FD in such a way that interest for any of the financial years does not exceed Rs 10,000.

For example, a 12-month fixed deposit of Rs 1 lakh at 10.5 per cent could be started in September as the financial year closes on 31st March. This way, the interest would split in two financial years, and hence, TDS will be avoided.



On other hands, this will only work on short duration FDs, for long term FDS, apart from the first year, all another year will be taxable.

Here is a summary of all three methods of saving TDS on bank fixed deposits:

How to avoid TDS on Bank Fixed Deposit


4. Splitting the Fixed Deposit
An individual can start one fixed deposit under his/her personal bank account and another one under an HUF account, and, so, both will be treated as separate. So an investor with an HUF identity can split the corpus under such two heads



This is similar to option 3 as you can only have a few FDs under your wife's name, your children's name or your parent's name.


That's all about how to avoid TDS tax deducted on bank Fixed deposits. These are legal ways to save tax, so don't worry about it but yes they pose some maintenance challenge, but just think about it, it's nothing as compared to the effort you put to earn that money. If rules allow you to save some money on tax then use it because one penny saved is one penny earned.

4 comments:

  1. Thank you for sharing such great information. It was very informative and has help me in finding out more detail about NRI Banking!

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  2. Fixed deposit is always safest investment option.

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  3. Will there be TDS if you open NRE FD?

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    Replies
    1. @Anonymous, No there is no TDS or income tax when you open NRE FD. They are completely tax free in India.

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