In a significant move aimed at providing relief to senior citizens, the Budget 2025 proposal includes a plan to double the Tax Deducted at Source (TDS) threshold for senior citizens earning interest income from bank Fixed Deposits (FDs). From the financial year 2026, the new threshold will increase to Rs 1 lakh, up from the previous Rs 50,000.
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This means that if a senior citizen’s annual interest income from a bank FD crosses Rs 1 lakh, the bank will be required to deduct TDS. However, if the interest remains below this threshold, no TDS will be deducted, making it easier for seniors to manage their income without facing immediate tax deductions.
How Senior Citizens Can Manage Their Investments to Avoid TDS
To ensure that their interest income remains below the Rs 1 lakh threshold, senior citizens can strategically manage their FD investments. The amount to be invested will depend on the interest rate offered by the bank. Various banks across public, private, and small finance sectors offer different interest rates for senior citizens, and these rates will influence how much principal an individual can invest without crossing the Rs 1 lakh interest limit.
For instance, in a cumulative (re-investment) FD, where the interest is added to the principal for compounding, TDS may be deducted from the second year onwards. This happens because the interest earned in the first year is added to the principal, thus increasing the total amount for the subsequent year. If the total interest in the second year exceeds Rs 1 lakh, TDS will be applicable.
In contrast, quarterly payout FDs ensure that no TDS will be deducted because the principal remains unchanged throughout the tenure, and interest is paid out regularly rather than compounded.
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High Interest Rates Across Banks
Several banks offer high interest rates for senior citizens, which can help them manage their FD investments effectively to avoid TDS. As of February 2025, Central Bank of India offers the highest FD rate of 8% for senior citizens across public sector banks. For private sector banks, Bandhan Bank offers 8.55%, and Unity Small Finance Bank leads small finance banks with a rate of 9.5%.
Using these interest rates, senior citizens can calculate the amount of investment needed to stay below the Rs 1 lakh interest threshold. For example, with an 8% cumulative interest rate, an investment of approximately Rs 12,13,110 will generate an interest of Rs 99,999 for the first year, preventing TDS deductions. However, as the interest compounds in the following years, the total interest will cross Rs 1 lakh, resulting in TDS deductions.
Tax Implications and the Role of Form 15H
The increase in the TDS threshold does not make interest income tax-free. Senior citizens whose total income exceeds the basic exemption limit will still need to pay taxes on the interest income, unless they opt for the new tax regime. To avoid TDS, senior citizens can submit Form 15H to their banks, declaring that their income is below the taxable limit of Rs 3 lakh under the old tax regime.
Chartered Accountant Ashish Karundia highlighted that starting April 1, 2025, banks and financial institutions will need to update their systems to ensure the accurate application of the new TDS limit. These institutions will also need to ensure that individuals who turn 60 during the year benefit from the increased threshold.
The Bigger Picture
The increased TDS threshold is a welcome relief for senior citizens, who often rely on their interest income for sustenance. This change is expected to significantly reduce the number of senior citizens who are subject to TDS deductions, thus providing them with better control over their finances. However, it is important to remember that interest income above Rs 1 lakh will still be subject to tax, and the new threshold merely postpones the tax liability until the end of the financial year.
As senior citizens take advantage of the new TDS rules, banks, co-operative societies, post offices, and other financial institutions will need to ensure their systems are capable of accommodating these changes, benefiting both senior citizens and the financial institutions themselves.
