FD interest: how it is taxed, TDS rules, and the accrual trap that catches most ITR filers

For informational purposes only. FD interest rates vary by bank and tenure. Tax rules are as per the Income Tax Act, 1961 for FY 2025-26. Consult a practising CA for advice specific to your situation.

Fixed deposit interest is one of the most commonly misreported income sources in ITR filings. The bank deducts 10% TDS and many people assume that is the final tax. It is not. If you are in the 20% or 30% tax bracket, you still owe the remaining tax when you file your ITR. And the income itself may be more than your bank's TDS certificate shows — because the AIS reports it on an accrual basis, not a cash basis.

This guide explains how FD interest is taxed, how TDS works, the accrual trap in multi-year FDs, and how to declare it correctly.

FD interest is fully taxable — always

FD interest is classified as "Income from Other Sources" (not capital gains). It is taxed at your applicable income tax slab rate, in the financial year in which it accrues.

There is no holding period benefit. An FD held for 5 years does not attract lower tax than one held for 6 months. There is no exemption for FD interest under the old or new tax regime (unlike PPF or EPF interest). Every rupee of FD interest is taxable at your slab rate.

If you are in the 30% slab, ₹1,00,000 of FD interest costs you ₹30,000 + cess in tax (₹31,200 total with 4% cess). At the 20% slab: ₹20,800.

How TDS on FD works

Banks (and post offices for post office FDs) are required to deduct TDS on FD interest under Section 194A of the Income Tax Act.

TDS threshold: TDS is deducted only if the total interest paid or credited by that bank in a financial year exceeds:

• ₹40,000 for regular depositors
• ₹50,000 for senior citizens (60+)

TDS rate:

• With PAN: 10%
• Without PAN: 20%

Key point: The ₹40,000 threshold is per bank, not per FD or per account. If you have three FDs at the same bank earning ₹15,000 each (₹45,000 total), TDS is deducted on all three even though no single FD exceeded ₹40,000.

TDS is not the final tax. If your slab rate is 20% and the bank deducted 10% TDS, you owe the remaining 10% when filing your ITR. The bank's TDS is a prepayment — it is credited against your total tax liability for the year.

Example: Vandana is in the 20% tax bracket. Her FD at SBI earns ₹80,000 interest in FY 2025-26. SBI deducts TDS at 10% = ₹8,000.

In her ITR, she declares ₹80,000 as income from other sources. Tax at 20% = ₹16,000. TDS already paid: ₹8,000. Additional tax owed in ITR: ₹8,000 (payable by July 31 or earlier if advance tax applies).

The accrual trap: multi-year FDs and what AIS shows

This is the most common FD tax mistake, and it trips up thousands of ITR filers every year.

Cash basis: You report interest only when you receive it (at maturity or when it is paid out).

Accrual basis: You report interest as it accrues each year, whether or not you received it.

The Income Tax Act requires interest income to be reported on an accrual basis — the year it is earned, not necessarily the year it is paid. The AIS (Annual Information Statement) on the income tax portal reflects what banks report to the tax department, which is also on an accrual basis.

The trap: You book a 3-year cumulative FD for ₹5 lakh at 7.5%. A cumulative FD does not pay out interest annually — it reinvests it and pays everything at maturity. But the interest accrues each year and is taxable each year under the accrual basis.

Year 1: Interest accrued ≈ ₹37,500 → taxable in FY 2025-26

Year 2: Interest accrued ≈ ₹40,313 → taxable in FY 2026-27

Year 3: Interest accrued ≈ ₹43,336 → taxable in FY 2027-28

The bank may not deduct TDS each year on a cumulative FD (some deduct at maturity, some annually). But regardless of TDS timing, you are required to report each year's accrued interest in the corresponding year's ITR.

If you instead report all ₹1,21,149 of interest in the final year when you receive it, you under-report in Years 1 and 2 and over-report in Year 3. The AIS will show a mismatch.

⚠ Common mistake: Filing ITR without reconciling FD interest against AIS. The AIS often shows higher FD interest than what the bank's TDS certificate reflects — because TDS was deducted on cash paid while AIS shows accrued interest. Always check the AIS before filing.

How to find your FD interest for ITR

Step 1: Log in at incometax.gov.in → e-File → View AIS → download the PDF (password: PAN in lowercase + DOB as DDMMYYYY).

Step 2: Under "Interest from deposit," look for all banks where you hold FDs. The AIS shows the interest reported by each bank to the tax department.

Step 3: Cross-check against your bank's interest certificate. Most banks issue an annual interest certificate (available in net banking → statements/certificates). For cumulative FDs, calculate accrued interest for the year if the bank doesn't issue a certificate.

Step 4: Report the higher of (a) the AIS figure and (b) what you have calculated. If there is a discrepancy you believe is wrong, file feedback in the AIS portal before filing ITR — the AIS has a feedback mechanism for corrections.

Form 15G and Form 15H: preventing TDS when your income is low

If your total income for the year is below the basic exemption limit (₹3 lakh under old regime, ₹4 lakh under new regime for FY 2025-26), you can submit a form to your bank to prevent TDS deduction.

Form 15G: For individuals below 60 years of age whose estimated total income for the year will be below the taxable threshold.

Form 15H: For senior citizens (60+) — same purpose but with slightly different conditions (total tax liability must be nil).

Submit at the start of each financial year (April). Submit to each bank where you hold FDs separately. Once submitted, the bank will not deduct TDS on interest, and you report the interest in your ITR (even if the income is below the taxable threshold and no tax is owed).

◇ Quick check: If you have not submitted 15G/15H and your income was below the taxable limit, the TDS deducted is refundable — file your ITR and claim the refund.

FD interest vs debt mutual fund: the post-tax comparison

For investors in the 30% tax bracket, comparing net returns matters.

Both are taxed at slab rate. The tax treatment is now equivalent for most debt instruments (post-April 2023 debt fund changes). The choice between FD and debt mutual funds is now driven by:

• Liquidity (liquid fund: T+1; FD: 1–3 days with possible penalty)
• Safety (FD is DICGC-insured up to ₹5 lakh per bank; liquid fund is not insured)
• Convenience (liquid fund via app; FD via bank)

Bottom line

• FD interest is taxable at your income tax slab rate as "Income from Other Sources" — there is no exemption or lower rate for FDs regardless of tenure
• TDS is deducted at 10% by your bank if annual interest exceeds ₹40,000 (₹50,000 for senior citizens) — but TDS is not the final tax; you owe the difference in your ITR
• Cumulative FDs accrue interest each year even without payment — declare accrued interest annually in your ITR, not all at maturity
• Check AIS before filing ITR — it often shows more FD interest than your TDS certificate because of the accrual basis
• Submit Form 15G (or 15H for seniors) at the start of each year if your income is below the taxable threshold

Frequently asked questions

Q: My bank deducted TDS at 20% because my PAN was not updated. Can I get a refund?

A: Yes. The 20% TDS is credited to your PAN in Form 26AS. Update your PAN with the bank. When you file your ITR, the excess TDS (20% minus your applicable rate) is refunded. Update your PAN now to prevent 20% TDS in future.

Q: I have FDs in my parents' names. Is the interest taxable for them or for me?

A: If the FD is in your parents' names and funded by your parents' own money, the interest is their income, taxable at their slab rate. If you funded the FD in their names (clubbing provisions): interest is taxable in your hands as "income from assets transferred to spouse/minor child." FDs in parents' (non-spouse) names are generally not clubbed.

Q: My bank doesn't show any TDS in my Form 26AS for my FD. Does that mean I don't need to declare the interest?

A: No. Absence of TDS does not mean the income is non-taxable. If your FD interest was below the ₹40,000 TDS threshold (so no TDS was deducted), you still need to declare the interest in your ITR under "Income from Other Sources." The income is taxable regardless of whether TDS was deducted.

Q: I have a 5-year tax-saving FD. Is the interest tax-free?

A: No. The investment (up to ₹1.5L) qualifies for Section 80C deduction under the old tax regime — the interest earned is fully taxable each year at your slab rate. The "tax-saving" label refers only to the upfront deduction, not the interest.

Sources: Section 194A — TDS on interest, Income Tax Department · AIS guide, Income Tax Department · FD interest taxation, ClearTax

Last verified: June 2026. Tax rules are as per Finance Act 2025 for FY 2025-26. Verify at incometax.gov.in.