How to Save Tax on FD Interest Legally in India

Fixed deposits remain one of India's trusted savings instruments, but the interest they earn is fully taxable, and many investors don't realise how much of their returns quietly disappear to tax every year. If you want to save tax on FD interest without breaking any rules, there are several legitimate, SEBI and Income Tax Act-compliant strategies available. From submitting the right forms to restructuring how and where you invest, this article will explain the 10 legal ways to reduce FD interest tax in India, helping you keep more of what your money earns.

How Is FD Interest Taxed in India?

To know how to save tax on FD interest, it is first important to know about how the FD interest tax works.

Key tax rules for FD interest in India (as of FY 2025-26):

• FD interest is not taxed at a flat rate but is rather added to one’s total taxable income and the applicable tax slab rate.
• If the interest earned from FD in one single bank exceeds ₹40,000 in a financial year (₹50,000 for senior citizens), then banks would automatically deduct TDS (Tax at Source) at 10%.
• But, if an individual has not submitted his PAN to the bank, then the TDS is deducted at 20%.
• TDS deduction does not mean your tax liability is settled, if your slab rate is higher than 10%, you must pay the difference when filing your ITR.
• Conversely, if your total income is below the taxable threshold, you can claim a refund of TDS already deducted.

Understanding these rules is the starting point for every strategy to reduce FD interest tax in India.

Also Read: Factors that you must consider before you invest in an FD

10 Legal Ways to Save Tax on FD Interest

1. Submit Form 15G or Form 15H to Your Bank

This is considered to be a simple and widely used way to save tax on FD interest. You can submit a self-declaration form to your particular bank if your total income for the year does not meet the basic exemption limit, requesting the bank to not deduct the TDS.

• Form 15G: This form is for individuals below 60 years of age whose total income is below the basic exemption limit, including the FD interest as well.
• Form 15H: Senior citizens above the age of 60 years whose tax liability is nil for the year.

It is important to note that these forms need to be submitted at the start of each fiscal year, more specifically in April before interest is credited. Submitting mid-year only prevents future deductions; TDS already deducted cannot be reversed through this route.

2. Spread FDs Across Multiple Banks

TDS on FD interest is done separately for each bank, and is not based on total interest received from FDs in all banks. If your interest income from one particular bank is less than the ₹40,000 limit (₹50,000 in case of senior citizens), the bank will not deduct the TDS.

How to use it legally:

Distribute your ₹15 lakh in FD among three or four banks so that the interest income from each individual bank is less than the limit for tax deduction. This does not lower your tax liability at the slab rate, but ensures that no tax is deducted on your interest income unnecessarily.

3. Invest in a Tax-Saving FD (Section 80C)

A five-year tax savings fixed deposit is a particular kind of fixed deposit scheme provided by scheduled banks in India that can avail the benefit of Section 80C of the Income Tax Act.

Key features:

• There is a lock-in period of exactly 5 years, since early withdrawal is not permitted.
• Tax deduction of up to ₹1.5 lakh each fiscal year under Section 80C.
• The principal amount invested is deductible, whereas interest earned is taxable as per income slab rate.

This is one of the effective ways to reduce FD interest tax in India on the principal side, even though the interest portion remains taxable.

4. Open FDs in the Name of a Non-Earning Spouse or Senior Citizen Parent

Interest from FDs held in his/her name may be below the level of taxable income if there is no source of independent income. But, you need to be aware of the clubbing provisions of section 64 of the IT Act where income generated from investments by transferring funds to your spouse would be clubbed with yours and taxed accordingly.
 

This strategy is applicable where FDs are opened in the name of senior citizen parents, whose income is very low or almost nil. Senior citizens are eligible for a higher rate of TDS exemption of ₹50,000, a basic exemption limit of ₹3 lakh (under old regime) and a deduction up to ₹50,000 on interest income under Section 80TTB, reducing the FD interest's tax liability.

5. Claim Deduction Under Section 80TTA (For Non-Senior Citizens)

As per Section 80TTA, any individual who is below 60 years of age is eligible to claim the deduction amount of ₹10,000, only with regards to interest received on his savings accounts and not from FDs.
 

However, senior citizens get a higher deduction limit of ₹50,000 in terms of Section 80TTB, which can be claimed with regard to interest income earned from all kinds of deposits such as FDs, savings accounts, and recurring deposits. Which is why, this is especially considered to be an impactful way for senior citizens to save tax on FD interest.

6. Opt for Cumulative FDs and Time Your Maturity

In a cumulative FD, interest compounds and is earned at the end of the term or maturity rather than annually or quarterly. Although interest is accrued yearly and needs to be reported accordingly, many individual investors have the option of choosing the maturity of their cumulative FD in a way that their overall income is relatively low for that year, like during retirement, sabbatical, or gap years with no salary income.
 

This is one of the more nuanced ways to reduce FD interest tax in India and requires advance planning aligned with your expected income trajectory.

7. Invest in SCSS (Senior Citizens' Savings Scheme) Instead of Regular FDs

Individuals above the age of 60 can go for the Senior Citizens Savings Scheme instead of fixed deposits in banks. This is an option provided by the government, and presently offers a favorable interest rate. Even though the interest earned through this scheme is taxable, the ₹50,000 exemption under Section 80TTB provides tax exemption on a substantial portion of interest income.

8. Use the New Tax Regime Strategically

Under India's New Tax Regime (introduced and updated under the Finance Acts), lower slab rates apply but many deductions and exemptions are not available.
 

Those individuals who fall in a higher slab due to their interest from FD under the old regime but fall into a lower slab due to their interest from FD under the new tax regime can switch to the new regime to effectively save tax on FD interest.

9. Diversify Into Tax-Efficient Alternatives

One of the effective long-term ways to save tax on FD interest is to gradually shift a portion of your fixed-income allocation to instruments with more favourable tax treatment.

Consider:

• Debt mutual funds (held over 3 years - check current tax rules): Tax treatment has evolved; consult a tax advisor for the recent applicable rules.
• RBI Floating Rate Savings Bonds: The interest is taxable but can benefit those in lower slabs.
• Public Provident Fund (PPF): It is fully exempt from tax under EEE (Exempt-Exempt-Exempt), the interest income from the PPF is tax-free.
• Tax-saving mutual funds: Although equity-oriented, tax-saving mutual funds provide the Section 80C benefits.

10. Ensure Accurate ITR Filing and Claim TDS Refunds

Many investors pay more tax on FD interest than they need to simply because they don't file their ITR accurately or on time.
 

What to do:
 

• Declare all FD interest income under "Income from Other Sources" in your ITR even if TDS has already been deducted.
• If your total income is below the exemption limit, file your ITR and claim a full refund of TDS deducted.
• Use Form 26AS and the Annual Information Statement (AIS) to cross-verify all TDS deductions made by your banks.
• If excess TDS has been deducted, the refund is typically processed within a few months of filing your ITR.

This is how to save tax on fixed deposit interest legally for the taxpayers which combines correct disclosure with refund claims where applicable.

Conclusion

There are several legal methods that can be used to save tax on FD interest in India, including filling Form 15G/15H, diversifying FDS among different banks, making use of Section 80TTB by senior citizens, and moving towards tax-efficient instruments. The key is to plan ahead of time during the beginning of each financial year. With the right approach, you can legally and significantly reduce your FD interest tax burden while keeping your savings working efficiently.