If you're planning to invest in an FD, be aware of these 5 tax rules. Mistakes could land you with an Income Tax notice!
FDs are considered safe investments, but the Income Tax Department keeps a close eye on high-value FDs. If you're considering a large fixed deposit, be sure to familiarise yourself with some tax rules to avoid any notices from the Income Tax Department.
Fixed Deposits (FDs) are considered a safe option for investors, but ignoring tax rules can be problematic, especially if you're investing in a large FD. Failure to declare the amount correctly could result in an Income Tax notice. Let's explore 5 important tax rules related to FDs:
1. Interest is Taxable
Interest earned on FDs is not tax-free. It's added to your total income and taxed according to your income tax slab. Whether it's a bank FD or a post office FD, the interest earned on both is taxable.
If ordinary citizens earn more than ₹40,000 in interest on their FDs annually, and senior citizens earn more than ₹1,00,000, the bank will deduct TDS on the amount. This limit for senior citizens was previously ₹50,000, but it was increased to ₹1 lakh in the financial year 2025-26.
2. TDS increases if PAN is not linked
| Status | TDS Rate |
|---|---|
| PAN Available | 10% |
| PAN Not Available | 20% |
If the PAN is not updated in the FD account, the bank increases the TDS rate from 10% to 20%. This applies under Section 194A of the Income Tax Act.
Therefore, be sure to update your PAN with the bank before making an FD.
3. Form 15G/15H must be filed.
If your annual income is below your tax slab, you can submit Form 15G/15H before the interest is deducted, preventing TDS from being deducted.
Form 15G: For those under 60 years of age.
Form 15H: For senior citizens.
4. Interest must be shown in ITR.
Many people think that the bank has deducted TDS, so there's no need to show interest. However, if this happens, the Income Tax Department may find a mismatch and issue a notice. Interest should always be shown under "Income from Other Sources" in the ITR.
5. Data is linked even if you have multiple FDs.
Even if you have FDs in different banks, the interest income is tracked by the Income Tax system, as all data is now linked to the PAN and AIS systems.
When can an Income Tax Notice be issued?
A notice can be issued if:
Interest income is not shown in the ITR.
There may be a TDS mismatch.
There may be an unusual transaction due to the PAN not being updated.
The interest is too high and hasn't been reported.
In such cases, the Income Tax Department issues a notice based on the AIS (Annual Information Statement).
How to avoid tax notices?
- Keep your PAN linked when opening an FD.
- Disclose interest income in your annual ITR.
- Submit Form 15G/15H if required.
- Be sure to check your AIS and Form 26AS.
