FD and KVP tax rules explained: TDS, taxable interest and key differences
Do you invest in fixed deposits (FDs) or Kisan Vikas Patra (KVP)? If yes, have you factored in the tax implications before making those investments?
This is an important question because taxes can have a direct impact on your overall returns. While safety and guaranteed returns often drive investment decisions, understanding how your earnings will be taxed is equally important for effective long-term financial planning.
Before investing, keep these two key points in mind:
- The Income Tax Act 2025 is applicable from 1 April 2026.
- Under the new Income Tax Act, 2025, interest earned on FDs and Kisan Vikas Patra (KVPs) continues to be a taxable source of income.
Being aware of these rules can help you report your income correctly, avoid tax-related mistakes and ensure smooth filing of your income tax return.
TDS rules for fixed deposit interest
Under Section 393 of the Income Tax Act, 2025, banks are required to deduct tax at source (TDS) on interest earned from fixed deposits once the prescribed threshold is crossed.
This applies even to cumulative fixed deposits, where the interest is added to the deposit and not paid out during the financial year. In such cases, TDS may still be deducted on the accrued interest.
However, investors should remember that TDS is only a method of collecting tax in advance. It does not determine your final tax liability.
Explaining the provisions, Nishant Shanker, Tax Controversy & Dispute Resolution, Navraj Global Advisors, said, “Interest earned on FDs and Kisan Vikas Patra (KVP) is taxable under the head ‘Income from Other Sources’ and is chargeable at the taxpayer’s applicable slab rates. Under the ITA 2025, Section 393 governs the deduction of tax at source on bank FD interest, with TDS applicable once the prescribed thresholds are crossed.”
KVP interest remains fully taxable despite no TDS
Kisan Vikas Patra is treated differently for TDS.
As Nishant Shanker explains, “However, KVP interest is not subject to TDS, though it remains fully taxable and must be disclosed in the income tax return. Taxpayers should note that TDS is merely a mode of tax collection and does not determine the final tax liability; the entire taxable interest must be reported while filing the ITR.”
Therefore, as explained above, the absence of TDS on KVP should not be mistaken or wrongly interpreted as a ‘tax exemption’; hence, any investor in these schemes should report their gains, if any, appropriately while filing their ITRs.
On similar lines, taxpayers who earn interest from fixed deposits should never presume that the ‘tax deducted at source’ by the banking institution fully resolves and settles their tax liability. This is because the final tax liability primarily depends on an individual’s applicable tax slab and total income.
In short, a clear and crisp understanding of the tax treatment of interest income from both FDs and KVPs can help individuals plan their finances more effectively and facilitate proper, accurate compliance with tax authorities for all eligible taxpayers.
This is because it can help them avoid reporting errors, omissions, and mistakes, reconcile TDS with their tax returns, and ensure compliance with the provisions of the Income Tax Act, 2025.
Disclaimer: This article is intended for informational purposes only and should not be construed as legal, tax, or financial advice. Tax laws are subject to interpretation and may change over time. Readers are advised to consult a qualified tax professional or financial advisor before making any investment or tax-related decisions based on their individual circumstances.
