How to Avoid Tax on FD Interest in India: TDS Rules and What Actually Works

If you're searching for how to avoid tax on FD interest, here's the direct answer: you can't avoid tax on the interest itself, since fixed deposit interest doesn't get any of the tax breaks that equity investments do. It's added to your income and taxed at your slab rate, full stop. What you can control is how much gets deducted as TDS during the year, whether that deduction happens at all, and how much of it you claim back.

FD interest is taxed at your slab rate, not a flat rate

Unlike long-term capital gains on equity, which get a preferential 12.5% rate, FD interest is classified as "income from other sources" and taxed at whatever slab rate applies to your total income. If you're in the 30% bracket, your FD interest is effectively taxed at 30%, cess included. There's no special lower rate for interest income, and no separate exemption limit for it beyond your normal basic exemption and any Section 87A rebate you qualify for.

This is the part people conflate with "avoiding" tax on FD interest. You can't reduce the rate or exempt the interest itself. What you can manage is the TDS deducted at source, and, more broadly, how much of your money sits in FDs versus other options.

How TDS on FD interest actually works

Banks are required to deduct TDS under Section 194A once your FD interest from that bank crosses a threshold in a financial year. From FY 2025-26, that threshold is ₹50,000 for individuals below 60 and ₹1,00,000 for senior citizens (TaxBuddy, Section 194A). TDS is deducted at 10% if you've provided your PAN, and at a steeper 20% if you haven't.

A detail that trips people up: this threshold applies per bank, not across all your FDs combined. Splitting a large deposit across three banks, each below the threshold, avoids TDS deduction at source, but it doesn't avoid the tax itself. You still have to declare all FD interest, from every bank, in your return. TDS is just a collection mechanism; your actual liability is based on total income regardless of how many banks deducted TDS or not.

Using Form 15G/15H to stop TDS at the source

If your total income for the year is below the taxable limit, you don't need to let the bank deduct TDS and then claim it back at filing time. You can submit:

Form 15G if you're under 60 and your total estimated income for the year is below the basic exemption threshold.

Form 15H if you're a senior citizen (60 or above). This form has a slightly more relaxed condition since senior citizens automatically qualify for a higher basic exemption limit and, often, the Section 87A rebate too.

These forms are self-declarations submitted to each bank separately, at the start of the financial year or when opening a new FD, telling the bank not to deduct TDS since you don't expect to owe tax. If you submit these forms but end up owing tax anyway (for instance, your income turns out higher than expected), you're still liable for that tax; the form doesn't retroactively make the income tax-free, it just changes who's responsible for calculating and paying it.

If TDS was already deducted, you can still claim it back

TDS on FD interest is not a final tax. It's an advance credit against whatever you actually owe. If your total tax liability for the year, after including the FD interest, comes out lower than the TDS deducted (or zero), you claim the excess as a refund by filing your ITR and reporting the TDS shown in your Form 26AS or AIS. This is one of the more common reasons people are owed a refund without realising it, especially retirees and anyone with FDs but income below the taxable threshold overall.

How to avoid tax on FD interest: the short version

To summarise the legitimate options: submit Form 15G or 15H so the bank doesn't deduct TDS in the first place, if your total income is genuinely below the taxable limit. Split large deposits across banks if you want to avoid TDS deduction at each one individually, understanding this doesn't reduce your actual tax liability, only the amount deducted upfront. And if TDS has already been deducted and you didn't owe that much tax, file your ITR and claim the difference back as a refund. There's no way to make FD interest itself tax-free beyond these mechanisms.

For a broader look at how interest income and residency status interact, Resident Tax Status in India: Why It Matters and How Your Interest Income Gets Taxed covers related ground. And if you're unsure whether your total income even requires filing, Who Actually Needs to File an ITR in India? is a good starting point.