FD interest rates are so high right now that people have abandoned the stock market. With interest rates at 7-8%, I can understand why.

The only problem is that the way FDs are taxed has a big impact on the compounding effect. This means that if your profit on FD in a given year exceeds ₹40,000, tax is deducted at 10%. This rate is deducted on an annual basis, whether it is a 2-year or 5-year FD.

How to avoid?

I assume everyone here produces more than 2.5L per year. So submitting Form 15G/Form 15H is of no use to you.

The only solution is to split your FD in multiple banks. Don't keep more than 6L in a single FD. Why? Because at 7% interest rate, that's a profit of ₹42,000, so ₹4,200 tax will be deducted. Instead, split the 6L in 2 banks.

7% interest on ₹3L is only ₹21,000 profit, which is below the tax limit and hence no tax will be deducted.

Note: You still have to pay income tax as per the income slab declared. But then you can pay from your savings account instead of deducting it from FD as it has a higher interest rate.
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