Tax on fixed deposits, and the year it actually falls due

The year the tax attaches is the year the interest accrues

Interest on a fixed deposit is taxed in the financial year it accrues, not the year the bank hands it to you. A deposit that pays out only at maturity therefore produces taxable income in every year of its term — including every year before the last, in which it pays you nothing at all.

That sentence does most of the work in this article, so it is worth being precise about what accrues means here. The bank computes the interest you have earned for the year, credits it — to your account on a payout deposit, to the deposit itself on a cumulative one — and reports it against your PAN for that year. Whether the cash moved is not the test. The credit is the event, and the credit happens annually whatever the deposit's payout schedule says.

The tax itself is unremarkable. Deposit interest is ordinary income, taxed at whatever slab rate your total income puts you on — there is no special rate, no threshold below which the first slice is free, and no reward for holding longer. Under the default new regime the slabs run nil up to ₹4 lakh, 5% to ₹8 lakh, 10% to ₹12 lakh, 15% to ₹16 lakh, 20% to ₹20 lakh, 25% to ₹24 lakh, and 30% above that. The regime you are in changes the ladder your interest is charged on; it does not change the year it is charged in.

The citations moved recently, so it is worth stating why the section numbers here may look unfamiliar. The Income-tax Act 1961 was repealed with effect from 1 April 2026 and replaced by the Income-tax Act 2025. Rates barely moved; the numbering all did. Where a number appears below it is a 2025 Act number, with the familiar 1961 one in brackets. If you are filing for FY 2025-26 — April 2025 to March 2026 — that year is still governed by the old Act.

One honest qualification, because it is a choice rather than a certainty. Annual accrual is what the bank does, what it withholds on, and what the department's own statements assume, so it is the default in every practical sense. Whether an individual may instead offer that interest only in the year of receipt, by adopting a receipt basis and following it consistently, is a question about the accounting method you are entitled to use — a position to take deliberately with an adviser, not a default to drift into, because it leaves a mismatch against the reported figure every single year.

A five-year cumulative deposit, year by year

Concrete case. You place ₹10 lakh in a five-year cumulative deposit — no payout, interest compounds inside, everything comes back at maturity. Here is what the tax year sees.

Read the last row twice, because it is where the mistake lives. In the year the money finally arrives, the income attributable to that year is one year's interest. The other four years were taxed when they accrued. A depositor who reports the whole maturity amount in year five has not been cautious — they have reported the same income twice, four years late, and the department's records will disagree with them about all five years.

The mirror-image error is more common and more expensive. Report nothing for years one to four because no cash arrived, and there are now four years of unreported income sitting on the department's statements against your PAN, each of which also carried an advance tax obligation at the time. Interest runs from the checkpoint the payment belonged to, so a shortfall from year one has been accruing interest for four years by the time anyone notices.

This is not a bank-specific rule. Any instrument that accumulates interest internally behaves the same way: a recurring deposit, a post office time deposit, and the National Savings Certificate, whose interest accrues annually at 7.7% and is not paid out until maturity. Whether NSC's accrued interest is still treated as reinvested for the purposes of the s.123 deduction is worth checking for your year rather than assumed. The accrual rule follows the structure, not the product name.

What the bank deducts is not what you owe

Two different things get called “tax on my FD” and conflating them is the second recurring error. The bank's deduction is a payment on account. Your liability is a computation on your whole year. They agree only by coincidence.

The bank's job is narrow. Once the interest it pays or credits you in a financial year crosses a stated threshold, it deducts tax at a fixed rate and pays it to the government against your PAN. It does this knowing one thing about you: this deposit relationship. It does not know your salary, your capital gains, your regime, or what any other bank paid you. The threshold and the rate both need checking for your year; neither is stated here, because both are the kind of figure that moves and a stale one is worse than a blank.

Three consequences follow, and each one bites a different person.

• Below the threshold is not tax-free. No deduction is made, nothing is withheld, and the interest is fully taxable anyway. The absence of a deduction is the absence of a withholding, not of a liability.
• Above the threshold is rarely enough. The bank deducts at a rate fixed for interest payments. A depositor whose total income sits in a higher band is short by the difference every year, quietly, with a statement that looks settled.
• For some people it is too much. Someone whose total income falls below the taxable limit has had money taken that was never due. A declaration to the payer can stop the deduction prospectively; recovering what has already gone requires filing a return.

Now the named failure mode, because it is the one people actively engineer. Splitting a deposit book across four banks so that no single bank crosses its threshold works exactly as intended — and achieves nothing. The threshold governs the bank's duty to deduct. It has no relationship to your liability, which is computed on the total. What the split actually buys is a year with no tax withheld, a full bill payable out of your own pocket at the end of it, and advance-tax interest on the checkpoints that passed unfunded. The withholding was the reminder, and the split removed it.

One more wrinkle specific to cumulative deposits, and it is worth knowing before you model the return. Where the bank recovers its deduction from the deposit itself — common practice, though worth confirming with the bank rather than assuming — the amount left compounding is smaller each year than the headline rate implies. A cumulative deposit advertised on a compounding table does not compound the gross rate for anyone above the deduction threshold. The gap between the table and the maturity advice is not an error; it is the withholding.

The senior-citizen relief, and the regime question that comes first

The Act has long carried a deduction on interest from deposits available only to senior citizens, and it is larger than the one available to everyone else — which is itself confined to savings-account interest and does not reach a term deposit at all. Both need checking against the 2025 Act for their section number and their amount, so neither figure appears here — and neither is the first question anyway, because a deduction only exists inside a regime that grants it.

So start with where the relief lives, which is the point almost every article on the subject omits. It is a deduction. The default new regime under s.202 withdraws the deductions and exemptions named in s.202(2)(a) — the specified investment deduction under s.123 with Schedule XV (formerly s.80C), the health insurance deduction under s.126 (formerly s.80D), education loan interest under s.129 (formerly s.80E), the house rent allowance exemption under Schedule III Sl. No. 11, which s.202(2)(a)(i) names outright, and the rent relief under s.134 (formerly s.80GG). A retiree who has never opted out of the default is in the regime that switches those off. The regime question comes first; the size of the relief is only interesting once you are in a regime that grants it.

Which sets up the part that is genuinely counterintuitive, and it cuts the other way. Deposit interest is ordinary income, not special-rate income. That matters because of the rebate: the new regime allows a rebate of up to ₹60,000 where total income does not exceed ₹12 lakh, and s.156(3) blocks it from sheltering special-rate income such as an s.198 long-term equity gain. Interest is not special-rate income. So a retiree whose income is largely deposit interest and whose total sits under the rebate ceiling can find the default regime settles the matter without any deduction at all — while the same retiree, having opted into the old regime for the sake of the deduction, is charged on the old ladder and may end up worse off.

The general shape does not settle any particular case, and the arithmetic has to be run on your own numbers, both ways, before either regime is chosen. But the ordering is the useful bit: compute the two bills, then look at deductions — not the reverse. A deduction is worth its amount multiplied by your marginal rate, and only if you are in a regime that has it. That is a much smaller number than the headline, and for a retiree under the rebate ceiling it is sometimes zero.

Two practical notes that survive either answer. A deduction never stops the bank deducting at source — withholding and liability are separate machinery, as above, so a senior citizen whose final liability is nil may still have to file to recover what was taken. And the five-year tax-saving bank term deposit, which is sold almost entirely on the s.123 deduction, is being sold on something the default regime does not grant. Whether it still appears in Schedule XV at all is worth checking; the ceiling on that deduction, where it applies, is ₹1.5 lakh across everything claimed under it, not per instrument.

A debt fund defers the same liability, and s.76 changed what that is worth

The honest comparison is not that one is taxed and the other is not. Both are taxed at your slab rate. What separates them is when.

A fund is a Specified Mutual Fund under s.76 if it holds more than 65% of its total proceeds in debt and money-market instruments. Before 1 April 2023, holding such a fund past a threshold moved the gain to a gentler treatment; that reward was withdrawn, and s.76 of the 2025 Act carries the withdrawal forward. Plenty of coverage read that as the end of the comparison. It was not. s.76 took the rate advantage, not the timing one.

Here is what the timing is actually worth. Take ₹10 lakh, and assume 7% a year for both — an assumption for the arithmetic, not a projection of anything, and deliberately identical so that only the tax timing differs. Assume tax takes a fifth of each rupee of income. A fifth is not any Indian rate; it is a round number chosen so the arithmetic can be checked without a calculator. Assume the tax is funded from the same pot in both cases, so the comparison is like for like.

• The deposit is taxed every year, so it compounds at 7% less a fifth — 5.6% net. Over five years ₹10 lakh becomes about ₹13.13 lakh, and nothing further is owed.
• The fund compounds at the full 7% to about ₹14.03 lakh. Redeem, and a fifth of the ₹4.03 lakh gain is due — about ₹80,500 — leaving roughly ₹13.22 lakh.

The gap after five years is about ₹9,000 on ₹10 lakh. That is the honest answer, and it is smaller than the deferral argument usually sounds. Run the identical arithmetic for 15 years and the deposit reaches about ₹22.64 lakh while the fund, after tax, reaches about ₹24.07 lakh — a gap of roughly ₹1.4 lakh. Deferral pays in horizon, and it pays almost nothing in the short one.

The mechanism behind that curve is worth carrying away, because it survives every Finance Act. Deferring a tax does not cancel it; the bill falls due either way. What deferral buys is the return on the tax money for the years between paying it and having to — which is the same arithmetic as the time value of money, applied to a rupee that belongs to the government but has not left yet.

And the trade-off, because there always is one. The deposit's contracted rate holds whatever happens to rates in between; a debt fund offers no such thing, and its NAV can fall. The full comparison — credit risk, liquidity, what breaking each one costs — is worked through in debt funds against fixed deposits. This section settles one leg of it only, and the leg it settles is worth less over five years than most people assume.

Five errors, each traceable to the accrual rule

1. Waiting for the maturity advice. The income arose in each of the earlier years and had a payment deadline in each of them. The maturity advice is a bank document, not a tax event.
2. Treating the deduction as the tax. The bank computed it from one relationship. Your liability is computed on the whole year, and the reconciliation is yours.
3. Splitting deposits to stay under the threshold. It changes what is withheld, never what is owed — and it removes the only automatic contribution towards a bill that still arrives.
4. Reporting the full amount in the final year. Four of those five years were already taxed. This is double-counting dressed as caution, and it creates a mismatch in every year of the term.
5. Assuming a nil liability means nothing to do. If tax was deducted during the year, a return is what recovers it. A liability of zero and a refund of zero are different statements.

Four of the five come from the same root: treating the arrival of cash as the trigger. Recurring deposits catch people the same way, and for the same structural reason — interest accumulates inside the contract and the tax year does not wait for the contract to end.

What to check, and where

The whole question is answered by dated records rather than by opinion, and the records are free.

• The bank's annual interest certificate, for every bank and every deposit, including the ones that paid you nothing. This is the figure the department has.
• The department's own statements. The annual information statement and the tax credit statement — still commonly called the AIS and Form 26AS, though the names are worth confirming for your year — show what was reported and what was deducted against your PAN. Reconciling these against the certificates is the whole exercise.
• The accrual year against the credit year. On a cumulative deposit it is possible for the year you offer the income and the year the credit appears to fall out of step. If they do, that is a matching question to settle before filing, not a figure to override in the return.
• Your regime, before anything else. The default is the new regime under s.202, and a deduction you are counting on may not exist in it.

The general machinery — checkpoints, interest on shortfalls, how a mismatch gets corrected — is set out in advance tax and TDS, and the slab ladder and heads of income in income tax basics. Neither is restated here.

Working it out on your own numbers

The tax side of this is arithmetic on dates and certificates. The question underneath it — whether the deferral is worth the loss of a contracted outcome over the horizon you actually have — is a question about the instrument, and that one can be tested rather than argued about.

FNOTrader's Mutual Funds app runs lumpsum and SIP simulations on the full AMFI NAV history, around 34 million NAV rows, and reports XIRR — the internal rate of return for cashflows landing on irregular dates — alongside invested against value, maximum drawdown and rolling-return distributions over any period you specify. Set against a deposit's contracted rate for the same period, that gives you the two things the comparison needs: what the fund actually did, and how far it fell while doing it.

It does not compute your tax, and no tool can do that from NAV data alone — the answer depends on your accrual years, your regime and the rest of your income. FNOTrader is not a tax adviser and nothing above is advice on your position.

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