How to Save Tax on Bank Interest:  8 Best Options

Written By – PKC Desk, Edited By Karunakaran, Reviewed By – Aakash

Tired of seeing your hard-earned bank interest shrink due to taxes? Learn with us how to save tax on bank interest.

These tax-saving strategies are effective and can help you significantly reduce your tax liability on bank interest. 

Conditions of Tax On Bank Interest Income in India 

In India, interest income from savings accounts, FDs, RDs is taxable under the head “Income from Other Sources” in ITR. 

Let’s take a look at the types of bank accounts and their interest related tax obligations: 

Tax on Savings Accounts Interest

Interest earned on a savings bank account is taxable. 

• Individuals and Hindu Undivided Families (HUFs) can claim a deduction up to Rs. 10,000 per year under Section 80TTA (Applies only to savings account interest from banks, post offices, or cooperative banks) 
• Section 80TTB allows Rs. 50,000. savings account interest rebate in income tax for senior citizens.
• There is no TDS on  saving bank interest

Category	Tax Rule
Taxable Head	Income from Other Sources
Tax Rate	As per your income tax slab
TDS Applicability	No TDS on savings interest alone
Deduction (Individuals/HUFs)	Up to ₹10,000 under Section 80TTA
Deduction (Senior Citizens)	Up to ₹50,000 under Section 80TTB

Tax on Fixed Deposits (FDs) and Recurring Deposits (RDs) Interest

Interest earned on FDs and RDs is fully taxable as per your income tax slab rates.

TDS on FD and RD Interest

Under Section 194A, banks have to deduct TDS if the total interest income exceeds the prescribed limit in a financial year.

Updated TDS Rules:

• Rs 40,000: Threshold for individuals below 60 years.
• Rs 50,000: Threshold for senior citizens (60 years or above).
• TDS Rate: 10% (if PAN is provided); 20% (if PAN not provided).
• Timing: Deducted at the time of credit or payment, whichever is earlier.

Even if your income is below the taxable limit, TDS may still be deducted. You can claim a refund while filing your ITR or avoid TDS by submitting Form 15G (for individuals) or Form 15H (for senior citizens) at the beginning of the financial year.

Particulars	Fixed Deposit (FD)	Recurring Deposit (RD)
Type of Income	Income from Other Sources	Income from Other Sources
Tax Treatment	Fully taxable	Fully taxable
Applicable Tax Rate	As per your income tax slab	As per your income tax slab
Deduction under 80TTA/80TTB	Not under 80TTA; available for seniors under 80TTB	Not under 80TTA; available for seniors under 80TTB
TDS Deducted by Bank	Yes	Yes (from FY 2015–16)

Miscellaneous 

• Interest earned on deposits in Non-Resident External (NRE) accounts is tax-free for Non-Resident Indians (NRIs).

• Interest earned from the Senior Citizen Savings Scheme is fully taxable

Bank Interest Taxed? Try These Effective Tips!

To save tax on bank interest, (savings accounts and fixed deposits), you can utilize specific provisions under the Income Tax Act in India. Let’s take a look at these and more: 

1.  

Split Fixed Deposits (FDs): 

Instead of investing a lump sum in a single FD, you create FDs that mature at different intervals. 

This strategy allows regular access to funds, maximizes interest rates, reduces your tax liability and simplifies tax planning.

2.  

Time Your FD Investments

Strategically timing your FD investments, such as starting a 1-year FD in September, allows you to split the interest earned between two financial years. 

This approach can help keep the interest accrued each year below the TDS deduction limits, thereby minimizing your tax liability on FD interest.

3.  

Tax-Saving Fixed Deposits:

Tax-saving FDs with a lock-in period of 5-years qualify for deductions under Section 80C up to Rs 1.5 lakh.

However, the interest earned is taxable, but the principal amount invested can help reduce your taxable income.

Pay less tax on your bank interest

see how PKC can help!

4.  

Consult With a Tax Professional 

A tax professional can provide personalized strategies to minimize taxes on bank interest income. 

Contact professionals like PKC Management Consulting to get help with tax-saving investments, and advise on ways to maximize deductions.

5.  

Utilize Form 15G/15H: 

If your total income is below the taxable limit, you can submit Form 15G (for individuals under 60) or Form 15H (for senior citizens) to your bank to avoid TDS on interest income. 

This form serves as a declaration that your income is below the taxable threshold. 

6.  

Claim Deductions for Interest Earned on Savings Account:

You can claim a deduction of up to Rs. 10,000 under Section 80TTA of the Income Tax Act.

This deduction applies to interest from savings accounts held in banks, co-operative societies, or post offices.

Remember that this limit is cumulative across all the accounts you hold. So, essentially the total interest earned from all accounts should not exceed Rs. 10,000 to qualify for the deduction.

7.  

Utilize Benefits for for Senior Citizens

Senior citizens (aged 60 years and above) can avail a higher deduction limit of Rs 50,000 under Section 80TTB. 

This deduction covers interest from savings accounts as well as fixed deposits.

8.  

Deductions on Investments

Although not a direct way of saving tax on bank interest, this can help reduce your overall taxable income and thus interest income earned and tax paid. 

Investing in tax-saving instruments like ELSS, PPF, NSC, SSY, and NPS allows you to claim deductions under Section 80C and 80CCD

Frequently Asked Questions 

Is interest earned on savings accounts fully taxable?

No, bank interest is tax free up to a limit on savings accounts. Up to Rs. 10,000 is exempt under Section 80TTA and Rs 50,000 for senior citizens under 80TTB. 

How to avoid tax on savings account interest?

You can save tax on bank interest by claiming deductions for interest up to Rs 10,000 from savings accounts. Senior citizens can claim a higher deduction of up to Rs 50,000.

Does the bank deduct TDS on savings account interest?

No. Banks do not deduct TDS on savings account interest. However, you still need to declare the interest income in your ITR and can claim a deduction under Section 80TTA/80TTB if eligible.

How can I save TDS on bank interest?

You can submit Form 15G (for individuals under 60) or Form 15H (for senior citizens) to the bank if your total income falls below the taxable limit. Splitting FDs across accounts can also keep interest income below the TDS threshold.

How do I avoid tax on FD interest?

Timing and splitting your FD can help you keep it below the taxable limit each year. You can also use  tax benefits for senior citizens.

Should I invest in tax-saving fixed deposits or PPF?

The choice between tax-saving fixed deposits and PPF depends on your investment goals and risk tolerance. PPF offers a higher interest rate and a longer lock-in period, while tax-saving fixed deposits provide more flexibility.

Is FD interest taxable in the new tax regime?

Yes. Under the new tax regime, FD interest is fully taxable as “Income from Other Sources.” It is added to your total income and taxed as per your income tax slab rate. But remember, no special exemption or deduction is available for FD interest under the new regime.

Is accrued interest taxable or not?

Yes. Accrued interest on Fixed Deposits (even if not yet received) is taxable each year on a yearly accrual basis.You must include the interest earned or accrued during the year in your total income when filing your ITR.

Is Tax Saver FD interest taxable or not?

Yes. Even though Tax Saver FDs (5-year lock-in) qualify for Section 80C deduction on the amount invested, the interest earned is fully taxable. The interest must be reported in your ITR and is taxed as per your income slab.