New Tax Regime
Fixed Deposits (FD) have always been a popular investment option among Indian taxpayers due to their assured returns and low risk. However, the taxation on FD interest income plays a crucial role in determining the final returns. With the Union Budget 2024 and Budget 2025 introducing several changes in the new tax regime, it is essential to understand how these updates affect FD interest income taxation.
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- Tax Deducted at Source (TDS) Threshold Increase
For General Citizens: In Budget 2025, the threshold limit for Tax Deducted at Source (TDS) on interest earned from fixed deposits has been increased from ₹40,000 to ₹50,000 per financial year. This means banks will now deduct TDS only if the annual interest income exceeds ₹50,000.
For Senior Citizens: For senior citizens, the TDS threshold has been raised from ₹50,000 to ₹1,00,000 per financial year. This change provides significant relief to senior citizens who primarily depend on interest income for their livelihood.
- Income Tax Exemption Limit under New Tax Regime
As per Budget 2025, the basic exemption limit under the new tax regime has been increased from ₹3,00,000 to ₹4,00,000. This change benefits low-income taxpayers by reducing their overall tax liability.
Additionally, the highest tax slab has been extended from ₹15,00,000 to ₹24,00,000, with a new 25% tax rate applicable on income falling within this range. This restructuring provides more tax relief to middle and upper-middle-income groups.
- Taxation of FD Interest Income
Interest earned from fixed deposits is fully taxable under the head ‘Income from Other Sources.’ This income must be added to the taxpayer’s total income and taxed at the applicable slab rates under the new tax regime.
Even if TDS has been deducted by the bank, the taxpayer must declare the interest income while filing the Income Tax Return (ITR). Failure to report the interest income may attract penalties and notices from the Income Tax Department.
- TDS Rates on FD Interest
- If the interest income exceeds the threshold limit, TDS is deducted at a rate of 10% if the PAN is provided.
- If the PAN is not provided, the bank will deduct TDS at a higher rate of 20%.
- No TDS is deducted if the interest income is below the specified threshold limit.
- Senior Citizens and Form 15H
Senior citizens who earn interest income below the basic exemption limit can submit Form 15H to the bank to avoid TDS deduction. This declaration is essential to ensure that banks do not deduct TDS unnecessarily.
- How to Report FD Interest Income in ITR
While filing the ITR, taxpayers need to report the FD interest income under the head Income from Other Sources. Even if TDS has been deducted, reporting the correct amount of interest income is mandatory to avoid any discrepancies in the income tax assessment.
- Impact on Disposable Income
The increased TDS thresholds and higher exemption limits in the new tax regime are designed to reduce the overall tax liability for taxpayers, especially senior citizens. This step aims to improve disposable income and encourage savings among individuals.
Conclusion
The changes introduced in Budget 2024 and Budget 2025 under the new tax regime offer substantial relief to fixed deposit investors, particularly senior citizens. The higher TDS threshold, increased exemption limits, and restructured tax slabs collectively ease the tax burden on interest income. However, taxpayers must ensure proper reporting of interest income while filing their returns to comply with the Income Tax regulations.
If you have significant interest income from fixed deposits, consider consulting with a tax professional to optimize your tax liability under the new tax regime.
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