Hike in TDS threshold in Budget 2025: How TDS is calculated on fixed deposits?

Finance Minister Nirmala Sitharaman in Budget 2025 introduced a revised threshold for TDS compliance for individuals, senior citizens, and companies. This adjustment aims to provide taxpayers with a means to reduce the amount of tax deducted from their income, while also assisting companies in simplifying their TDS compliance process.

The proposed threshold has been increased by Rs 10,000 for individuals and doubled for senior citizens. Under the new proposal, tax will only be deducted from income sources such as FDs and RDs if it exceeds Rs 50,000 in a financial year for the general public.

The primary objective behind this modification is to allocate more funds to the middle class and senior citizens. For senior citizens, tax deductions will now only occur when their interest income from savings accounts, FDs, and RDs surpasses Rs 1 lakh in a financial year. Presently, the threshold for the general public stands at Rs 40,000, while for senior citizens it is set at Rs 50,000. These changes are set to take effect on April 1, 2025.

TDS on FDs

Fixed deposits are a popular and attractive investment option that offers higher interest rates, making it a secure and reliable way to grow wealth. This bank-issued investment allows investors to earn interest at a fixed rate on their deposited amount, with the flexibility of choosing to receive interest payments monthly, quarterly, semi-annually, or annually.

Fixed deposits are considered one of the safest investment options as they provide guaranteed returns without the risk of capital loss. Compared to savings accounts, fixed deposits offer a better rate of interest, making them a favorable choice for those looking to maximize their returns.

In India, Tax Deducted at Source (TDS) is a government process that involves deducting taxes at the source of income. When a person (deductor) is required to make a defined payment to another person (deductee), they must deduct and deposit the tax in the Central Government’s account.

The deductee who has had Income Tax deducted at source is eligible to receive a credit for the amount deducted, which can be claimed based on Form 26AS or a TDS certificate issued by the deductor.

Tax Deducted at Source (TDS) on fixed deposits refers to the portion of an investor’s premium and interest that the bank withholds upon maturity of the FD. The amount is typically calculated based on a set percentage of the final dividend and remitted to the government as tax. Subsequently, it is integrated into the recipient’s income tax records and reconciled with their unique tax returns.

In an effort to streamline tax compliance, the government has introduced changes to tax deducted at source (TDS):

Interest income: The TDS exemption limit on interest for senior citizens has been increased from Rs 50,000 to Rs 1 lakh. For other individuals, the exemption limit is now Rs 50,000 when the payer is a bank, co-operative society, or post office, and Rs 10,000 in other cases.

How is TDS calculated on FDs

The interest earned on Fixed Deposits (FDs) is fully taxable and falls under the category of ‘income from other sources’. The Tax Deducted at Source (TDS) on FDs is determined based on the interest income earned during the financial year, taking into consideration factors such as the interest rate, deposit amount, duration, and applicable tax slabs.

If your annual income is below Rs 2.5 lakh, the bank will not levy any tax on your fixed deposit. However, some financial institutions may require you to submit Forms 15G or 15H in order to avail of tax deductions.

If the annual interest income from FDs is less than Rs 40,000, it is not subject to TDS. However, if the interest income exceeds Rs 40,000, a TDS of 10% is applicable. Additionally, if a PAN card is not provided, the bank may withhold 20% of the TDS amount.

Senior citizens must comply with the same regulations as other account holders, except their interest earnings must exceed Rs 50,000 instead of Rs 40,000.