INR Guide on How to avoid TDS on fixed deposits
One of the worst things about Fixed deposits is 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. So don’t allow the banks to deduct tax at source on your fixed deposit, particularly if you're not liable to pay at all.
Introduction to TDS (Tax Deducted at Source)
Tax Deducted at Source (TDS) is a means of collecting income tax in India, under the Indian Income Tax Act of 1961.TDS is the process of collecting tax as and when income is generated. It streamlines the process of collecting taxes for the tax department. TDS is applicable on several incomes such as salary, interest, commission, rent, brokerage, professional fees, royalty, and others. It is deducted at the prescribed rate by the tax department if Permanent Account Number (PAN) is provided by the recipient of the income or at the rate of 20% in absence of PAN, whichever is higher. The deductor is liable to remit the collected tax into the account of the central government.
The income-tax law prescribes a threshold limit for each source of income after which TDS will apply. For instance, according to section 192 of the income-tax Act, if your salary income is less than the maximum amount not chargeable to tax (Rs.2.5 lakh for an individual, Rs.3 lakh for senior citizens and Rs.5 lakh for very senior citizens), no TDS should be deducted on it by the employer. Similarly, according to section 194-I of the Act, rental income up toRs.1.8 lakh in a year is exempt from TDS.
Here’s how you can avoid paying TDS on fixed deposits:
1. By Submitting Form 15G or 15H:
These are essentially self-declaration forms for certain types of incomes—15G is for those younger than 60 years and 15H is for senior citizens—above 60 years of age. Where source of income is ‘interest on securities’ or dividend or interest other than ‘interest on securities’ or, income in respect of units under section 197A, self-declaration in these forms can be submitted.
The provision to use these forms has now been extended to include rental income as well, effective from 1 June 2016. These two forms should be submitted each year, because your tax liability can fluctuate with each passing year.
2. Distributing your FD investment in different banks:
Another way to avoid TDS on your fixed deposits is that you can divide your investment, either between different accounts or across banks, so that no bank can deduct tax on your investment. For this, all you need to do is calculate the tax liability on your entire investment. Then split up your deposits in different banks or even branches so that it does not exceed Rs10, 000.
3. Properly time your investments:
Instead of investing your savings at the start of the year, wait for the middle of the financial year in case of a year-long FD. This way, interest is split between two financial years. September or October is the perfect time for this.
For example, a 12-month fixed deposit of Rs.2 lakh at 9 per cent could be started in October as financial year closes on 31st March. This way, the interest would split in two financial years and hence TDS will be avoided.
So, these are legal ways to save tax, so don't worry about it.
Wishing you Lots of luck and success!!