When there is TDS from the interest accrued annually on cumulative bank fixed deposits it not only leads to loss of interest deducted as tax but additional loss of the compound interest that would have been earned during balance tenure of FD, on the tax deducted. There's a way to reduce the second type of loss - get the TDS cut from your savings account balance instead of from the interest accrued on the FD.
Some banks such as HDFC Bank and SBI have started offering this facility.
How deduction TDS on FD hurts
The maturity amount that the bank mentions on fixed deposit receipt (FDR) is computed with an assumption that no TDS will be deducted on the interest earned on that FD. However, if TDS is deducted later, it not only decreases the maturity amount by the amount of TDS deducted, but the maturity amount is further reduced due to loss of compounding interest that the deducted TDS amount would have earned during the remaining course of the deposit.
How TDS is deducted from bank FD interest
If the total interest earned on your fixed deposits goes above Rs 40, 000 (Rs 50, 000 in case of senior citizens) in a financial year, the bank is liable to deduct TDS at the rate of 10% from the interest amount. The rate of TDS goes to 20% if the depositor has not updated his/her PAN with the bank. In case of NRO account, the TDS rate is 30%.
Only a handful of people calculate the net loss they incur due to this TDS deduction from the fixed deposit interest. If you do the calculation, you can find out the loss especially on long term FDs. For instance, if you are a senior citizen and have booked an FD of Rs 10 lakh for 5 years at an interest rate of 6.15%, you may lose Rs 4,729 over and above the deducted TDS due to loss of compounding.
Usually TDS is deducted from the accrued interest of your fixed deposit. However, in case the interest amount is not sufficient to cover the TDS, then the TDS can be deducted from the principal amount of your FD as well. As a result, the amount of deposit that is available to earn compound interest at the contracted interest rate (on the FD) for the next quarter, comes down.
How to prevent the additional loss
If your total taxable income including the interest income from FD is below the basic tax exemption limit you can prevent TDS by filling Form 15G/H. You can also prevent the TDS deduction by spreading your FDs into different banks to keep the total interest income in a financial year below the threshold of TDS. To know more read TDS on cumulative FDs: Your money loss is more than the tax deducted.
However, if the amount is bigger or it is cumbersome to manage so many bank accounts, especially in case of senior citizens, you have to find another way of stopping this deduction.
If the depositor is allowed to pay TDS amount from saving or current account with the bank, then the full interest on the FD (without TDS) will earn compound interest for the remaining tenure of the deposit. Consequently, you will get the full maturity amount which is mentioned in your FDR.
As a current account earns no interest on the balance maintained, by letting the TDS get deducted from this account, your idle deposit amount here will help your FD get the benefit of compounding interest on the TDS amount.
TDS from a savings account, on the other hand, will lead to loss of savings account interest on the amount so deducted, but this would normally be less than the interest lost if the TDS is from the FD interest. As the saving account earns a low interest, your net benefit will be the difference of interest between saving and fixed deposits. For instance, if you have a senior citizen FD with SBI for 5 years it earns an interest of 7.5%% as on March 16, 2023, however, an SBI savings account earns an interest rate of 2.7% per annum for balance up to Rs 10 crore.
Of course, it's important to ensure that you maintain sufficient balance in your saving/current account so that TDS of the FD can be deducted from the saving/current account balance without it falling below the minimum balance amount.
Link your savings or current account for TDS deduction
The largest public sector bank, SBI, allows its customers to link saving account or current account or an overdraft account for the deduction of TDS on fixed deposits. SBI customers can use this linking facility via Net banking.
How SBI allows linking saving or current account for TDS deduction
- You may link SB/CA/OD account with your term deposit/RD account for TDS deduction.
- After that TDS for your selected deposit account will be debited from SB/CA/OD account.
- The deposit A/c and saving bank / current account should be under the same CIF to enable linking.
- Linking of saving bank / current account for TDS deduction is applicable for Domestic and NRO customers only.
- How HDFC Bank allows the linking
The largest private sector bank, HDFC Bank, also allows the deduction of TDS on fixed deposits from saving account or current account. However, to avail this facility you will need to fill up a form and submit it to the branch where your FD was opened. You can download this form using this link:
https://www.hdfcbank.com/content/bbp/repositories/723fb80a-2dde-42a3-9793-7ae1be57c87f/?path=/Footer/Resource/Forms%20Centre/Content/Detail%20Page/Forms%20Center%20-personal/CASA%20linking%20form%20for%20TDS%20recovery.pdf
So, if you are facing such TDS deduction and want to prevent it by linking your saving or current account, you need to get in touch with your bank to find out if it allows such linking. If your bank allows it, then you can prevent the compounding loss on your FD. If you bank does not offer this facility it gives you reason to consider investing in an FD of a bank that offers this facility.
