Key Takeaways
- FD and RD interest is added to your income and taxed at your slab — it is not tax-free.
- TDS by the bank is a prepayment; you still declare the full interest in your return.
- Interest is generally taxed as it accrues each year, even on cumulative deposits paid at maturity.
- Compare deposits with alternatives on a post-tax basis, not headline rates.
On this page
Interest is income
When a bank credits interest to your FD or RD, that amount is income for tax purposes. It falls under the head income from other sources and is taxed at whatever slab rate applies to your total income — see how income tax calculation works. Someone in a higher slab keeps less of the same headline rate than someone in a lower slab.
Cumulative deposits: taxed as you go
With a cumulative FD, interest is reinvested and paid at maturity. For tax, however, interest is generally taxed in the year it accrues, not when you receive it. Banks report accrued interest annually, so a five-year deposit typically means five years of interest to declare. The FD calculator year-by-year table shows how much interest accrues each year for exactly this reason.
TDS by the bank
If interest credited across your deposits at a bank crosses the applicable threshold in a financial year, the bank deducts TDS and deposits it with the government. This is a prepayment against your final tax (see What is TDS?). Two points people miss:
- If your income is below the taxable limit you can submit the relevant declaration form to avoid TDS — but the interest is still reportable.
- If your slab rate is higher than the TDS rate, you owe the difference when you file.
Why post-tax return matters
Two products with the same headline rate can leave you with different amounts depending on how each is taxed. That is the honest way to compare an FD with, say, PPF or a debt mutual fund — read FD vs PPF for the qualitative comparison. Tax treatment of each product is set by current law and changes; verify before deciding.
Senior citizens and special cases
Higher TDS thresholds and specific deductions for deposit interest have existed for senior citizens. Because these limits are revised, check the current provisions on the Income Tax Department portal.
Sources
We reference primary and official sources. Rate- and rule-dependent details must be verified against the latest official information.
Related Calculators
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