In India, fixed deposits invite a tax deducted at source (TDS) based on the type of investment under discussion. Interest on the majority of the instruments except PPF and tax free bonds do attract tax. So, here are some smart ways to adopt to avoid TDS. However, it’s important to remember that interest has to be added to total income for payment of income tax.
Submission of Form 15G/15H
If you are categorized under the overall income exemption limit, submitting Form 15G to your bank is all that you need to do to avoid TDS.
This form redirects your bank to skip any kind of deduction on your Fixed Deposit interest income as you do not have any net taxable income.
Also, senior citizens or anybody turning 60 years of age during the current financial year, have to fill up and submit Form 15H. However, the working procedure is mostly similar.
Going by current regulations, any citizen and HUFs (except NRIs) are eligible to fill this form, if the final tax over total estimated income is zero in the running financial year.
Submitting Form 15G/15H only functions if your PAN is mapped directly to your bank account.
These forms are available in any bank branch. Also, it can be done availing net banking.
Splitting your FD across banks
Another great way of avoiding TDS is by splitting your fixed deposits across several banks in a way that total interest in a single year at one bank stays below INR 10k.
Timing your FD
Another way to reduce TDS on your Fixed Deposit income is simply by timing your investment such that the interest earned initially doesn’t exceed 10k.
This method works only if the Fixed Deposit investment is done in the middle of the year and it goes defunct after first year.
Registration as an HUF
This is almost like a guarded secret.
HUF, which expands to Hindu Undivided Family, regardless of the name, states all Hindus, Buddhists, Sikhs and Jains as eligible to form one.
The striking factor of any HUF is that it has its unique identity that is entirely distinguished from that of individuals forming part of it.
That implies that each HUF will own a separate PAN and any income generated by it will be taxed without any dependence.
In simple words, you can make one fixed deposit with your name and the other with HUF’s name; legally the taxes will be calculated differently.
By maintaining <10k interest income in these, you get to avoid any TDS at all.
But, the goodness of HUFs continues.
And in fact, HUFs is a great legal way to reduce your liability regarding tax.
Take into account the other forms of debt income
Fixed deposits are inherently tax inefficient. But there exists other forms of debt income, with better working procedure. Those are equally good, in fact, better than Fixed Deposits from perspective of returns.
Public Provident Fund is an example of that. The returns are higher than a lot of fixed deposits and also escape tax. However, for PPF is the initial lock-in period of 15 years and comes with an upper limit of 1.5 lakhs per year.