Fixed deposits are a low-risk, traditional investment method where a lump sum of money is deposited in a bank or financial institution for a specific period. It is a good investment option for senior citizens due to its high security. It offers fixed interest rates, guaranteed returns, flexible tenure (from a few days to a few years) and multiple options for receiving interest (monthly, annually or at the end of the term). It is a safe way to grow savings and comes with additional benefits like loan facilities or tax savings. However, TDS is deducted on the interest earned.
Is TDS deducted on interest for senior citizens?
If the interest earned from a senior citizen’s bank fixed deposit exceeds Rs 1 lakh, then the bank has to deduct TDS on that interest. For ordinary citizens, this limit is not Rs 1 lakh, but Rs 40,000. Remember, TDS is not an additional tax. You can get it back as a refund or adjust it with your total tax liability while filing your income tax return.
Interest can also be earned on the refund
Anyone eligible for a tax refund is also eligible to receive interest on that refund amount. For example, if a senior citizen has an annual gross income totaling ₹11, 00,000, he will be exempt from paying any income taxes under the New tax system during the fiscal year 2025-26, because he qualifies for the section 87A tax rebate. Under the New Tax System for FY2025-26, an individual can qualify for the Section 87A tax rebate if he has gross annual income equal to or below ₹12,00,000. Thus, any interest earned on that gross amount, such as interest on ₹1,00,000 of gross earnings, can be added to the gross income of ₹11,00,000, making that total gross annual income equal to or below ₹12,00,000 totally tax exempt.
Also, senior citizens can file Form 15H to avoid TDS. If their total income after claiming all tax deductions and Section 87A rebates is below the taxable limit, which is Rs 12 lakh in the new tax regime or Rs 5 lakh in the old tax regime, then they can avoid deducting TDS by filing this form.
It is mandatory for banks to follow these rules. Income tax is not applicable if the annual income is below Rs 12 lakh. However, banks and other financial institutions have to deduct TDS. This is because as per the law, TDS is mandatory if the interest or income exceeds a certain limit! In the case of senior citizens, this limit is Rs 1 lakh. Banks do not know the actual tax liability of a person. So, they deduct TDS only when the annual interest amount exceeds Rs 1 lakh. Therefore, filing Form 15H is the best way to inform the bank in advance.
