Taxation on Bank Deposits: What Interest on Your Deposit Means for Your Taxes

 One of the most common investment options for an Indian investor is bank deposits. These include savings accounts, fixed deposits (FD), and recurring deposits (RD). Investors choose these for safety and stable returns rather than higher and risk-prone returns.

The interest earned through these deposits is taxable, making it important to understand the taxation on bank deposits. This includes the amount of tax payable, its timing, and the measures an investor can take to legally reduce their tax burden.

In this blog, we will review how taxation works on interest earned on deposits and the deductions and exemptions available. We will also cover how the TDS works and the recent changes that could affect the taxes you pay.

 

What Is Interest on Bank Deposits?

When you deposit money with a bank, the financial institution pays you interest as compensation for using your money. Common types include:

·         Savings account interest - interest paid on the regular bank balance

·         Fixed deposit (FD) interest - higher, guaranteed returns for locking in funds for a fixed period

·         Recurring deposit interest - returns on periodic monthly contributions

How Is Taxation on Bank Deposits Treated?

The Income Tax Act classifies the interest earned from bank deposits as “Income from Other Sources.” You must include this while computing your taxable income for the year and it is taxed as per your applicable slab rate.

Interest on bank deposits is taxable on an accrual basis, regardless of whether the interest is credited or added back to the deposit. So even if the bank does not deduct tax at the source (TDS), interest income still remains taxable and must be reported in your Income Tax Return (ITR).

Tax Deducted at Source (TDS) is the process in which banks withhold a portion of interest income before crediting it to your account and remitting it to the government. This is considered an advanced collection and not the final tax liability.

 

How Are Different Deposit Types Taxed?

Different types of bank deposits are taxed differently. While the interest earned is generally taxable, the applicable deductions and TDS rules vary for savings accounts, fixed deposits, and recurring deposits.

A. Savings Account Interest

·         Under Section 80TTA of the Income Tax Act, you can claim deduction of up to ₹10,000 per year on interest. This reduces your taxable income

·         Banks don’t deduct TDS on savings account interest, irrespective of amount

B. Fixed Deposit (FD) and Recurring Deposit (RD) Interest

·         Banks or post offices may deduct TDS under Section 194A if the total interest earned from fixed deposits or RDs in a financial year exceeds the prescribed threshold

·         Unlike savings account interest, no deduction is available for interest earned on FDs or RDs

New TDS Thresholds on Bank Interest (Effective April 1, 2025)

From April 1, 2025, the government increased the interest limits up to which banks do not deduct TDS on fixed deposit (FD) and recurring deposit (RD) interest.

 

Category

TDS exemption limit per year

Individuals (below 60 years)

₹50,000 (earlier ₹40,000)

Senior citizens (60 years and above)

₹1,00,000 (earlier ₹50,000)

 

What this means:

Banks will deduct TDS on FD or RD interest only if your total interest for the year exceeds ₹50,000 (or ₹1,00,000 for senior citizens). If your interest stays within these limits, no TDS will be deducted — though the interest may still be taxable based on your total income.

TDS Rates

·         10% TDS if your PAN is provided to the bank

·         20% TDS  if you fail to provide a PAN or if the provided PAN is not valid

Example

If a senior citizen earns ₹55,000 as interest from a bank during a financial year, the amount exceeds the ₹50,000 threshold prescribed under Section 194A.

As a result, the bank may deduct 10% TDS on the entire interest of ₹55,000, amounting to ₹5,500.

Note: TDS is not the final tax. You must still include all interest in your total income and calculate your final tax based on your slab rate when filing your ITR. Any TDS already deducted is adjusted against your final tax liability.

 

What Are Special Tax Benefits For Senior Citizens?

For senior citizens (60+ years), the government provides extra relief on interest income:

Section 80TTB

·         Senior citizens can claim a deduction of up to ₹50,000 on interest income from deposits (including savings, FDs, RDs with banks or post offices)

·         This is separate from Section 80TTA and applies solely to seniors

This benefit is particularly significant for retirees who often rely on interest income as part of their regular cash flow.

How to Prevent TDS on Interest Income (If You Have No Tax Liability)

If your total income results in “nil tax liability”, you may not owe any tax even if the interest income is high. To prevent unnecessary TDS deduction, you can submit the following declarations:

·         Form 15G: For individuals below 60 years whose total income (after deductions) is below the basic exemption limit and whose tax liability is nil

·         Form 15H: For senior citizens (60 years and above) whose estimated tax liability for the year is nil

Submitting these forms informs the bank that you are not liable to pay tax for the year, and therefore TDS should not be deducted on your interest income.

 

Final Thoughts

Understanding how bank deposit interest is taxed is just as important as choosing the right deposit. Interest may seem small, but its tax impact can add up if ignored. Knowing the rules around TDS, slab rates, and available deductions helps you avoid surprises, improve cash flow, and make smarter use of safe investments like savings accounts, FDs, and RDs.

 

 

FAQs

1.      Is interest earned on bank deposits taxable in India?
Yes, interest from savings accounts, fixed deposits (FDs), and recurring deposits (RDs) is taxable in India under Income from Other Sources as per your income tax slab.

2.      How much savings account interest is tax-free under Section 80TTA?
Under Section 80TTA, individuals (below 60 years) can claim a deduction of up to ₹10,000 on savings bank interest in a financial year.

3.      What is the TDS limit on FD interest for non-senior citizens in 2025?
From April 1, 2025, banks deduct TDS only if FD/RD interest exceeds ₹50,000 per year for non-senior citizens.

4.      Do senior citizens have to pay tax on FD interest income?
Senior citizens can claim a deduction of up to ₹50,000 on total interest income under Section 80TTB, but interest above this limit may still be taxable.

5.      How can I avoid TDS on bank deposit interest legally?
You can submit Form 15G (non-seniors) or Form 15H (senior citizens) if your total income is below the basic exemption limit to avoid TDS.

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