Senior citizens: How the Rs 1 lakh TDS threshold affects your FD earnings

Rs 1 lakh TDS threshold for senior citizens on fixed deposit interest reduces procedural hassles but doesn't exempt them from tax liability. Senior citizens must ensure accurate reporting in returns.

In a significant move aimed at reducing administrative burden for senior citizens, the government while presenting the Union Budget for fiscal 2025 amended Section 194A of the Income Tax Act, 1961, raised the threshold for Tax Deducted at Source (TDS) on fixed deposit (FD) interest for senior citizens to Rs 1 lakh per annum, up from the previous threshold of Rs 50,000 from April 1, 2026. If the annual interest amount is  Rs 1 lakh in a particular bank, i.e. at the aggregate level in a bank, then no TDS will be deducted by the bank.

 

While this change offers some relief by reducing the number of TDS deductions at the source, experts caution that the fundamental tax obligations for seniors remain unaffected, and they must continue to report their income accurately in their tax returns.

 

"The recent amendment to Section 194A of the Income Tax Act, 1961, raising the threshold for Tax Deducted at Source (TDS) on fixed deposit interest for senior citizens to ₹1 lakh per annum, constitutes a procedural recalibration rather than a substantive exemption from tax liability. This legislative modification, effective April 1, 2025, serves to alleviate administrative inconveniences for senior citizens by reducing the incidence of upfront TDS deductions by banking institutions. However, it is of paramount importance to recognize that the obligation to disclose and pay tax on the entire interest income persists, as per the established jurisprudence governing direct taxation in India. It is settled law that TDS is merely a facilitative mechanism for tax collection and does not, in any manner, determine the ultimate taxability of income. Accordingly, senior citizens must remain vigilant in ensuring full and accurate disclosure of their interest earnings in their annual Income Tax Returns (ITR), failing which they may be exposed to punitive repercussions, including but not limited to the imposition of penalties under Section 271(1)(c), extending up to 200% of the tax sought to be evaded," said Tushar Kumar, Advocate, Supreme Court of India.

 

A Procedural Change, Not a Tax Exemption

The amendment to Section 194A of the Income Tax Act, 1961 primarily seeks to alleviate administrative burdens for senior citizens. Under the new rule, banks will no longer deduct TDS on fixed deposit interest of up to Rs 1 lakh annually for senior citizens. This adjustment reduces the number of TDS deductions and eliminates the hassle of upfront tax payments for many.

 

However, Kumar points out that TDS is a collection mechanism rather than a final determination of tax liability. It helps facilitate tax payment but does not absolve individuals from paying tax on their income. Therefore, despite the increased threshold, senior citizens must accurately disclose their fixed deposit interest income when filing their ITR.

 

Compliance Remains Crucial

The Income Tax Department continues to track high-value transactions through the Annual Information Return (AIR) system, which reports interest payments from financial institutions. Consequently, even if no TDS is deducted, interest income exceeding Rs 1 lakh will still be reported to the department. If there is any discrepancy between what is reported by the bank and what is disclosed in the taxpayer's ITR, the Income Tax Department could issue notices under Section 143(1) for scrutiny. This could lead to penalties under Section 271(1)(c) if tax evasion is detected.

 

For instance, Mrs. Iyer, aged 72, earns Rs 1.2 lakh in fixed deposit interest. If she reports only Rs 1 lakh in her ITR to avoid TDS, this discrepancy will likely be flagged by the system. If it's found that the underreporting was intentional, she could face penalties of up to 200% of the tax sought to be evaded, along with interest liabilities, explained Kumar.

 

Filing Form 15H: A Procedural Benefit

Senior citizens whose total taxable income falls below the basic exemption limit of Rs 3 lakh per annum are eligible for a relief from TDS by filing Form 15H with their banks. This form ensures that the bank does not deduct any TDS on the interest income. However, this is a procedural relief and does not eliminate the requirement to pay tax if the senior citizen's income exceeds the exemption limit.

 

For example, Mr. Gupta, aged 66, earns Rs 90,000 from his pension and Rs 80,000 from fixed deposits. His total income of Rs 1.7 lakh remains below the taxable threshold, so he may file Form 15H to ensure that no TDS is deducted. However, even with this procedural benefit, he must still report the interest income accurately when filing his ITR, or he risks scrutiny and penalties.

 

Strategic Tax Planning to Avoid TDS

Senior citizens who expect to earn more than ₹1 lakh in annual fixed deposit interest may consider structuring their investments to avoid TDS deductions. One option is to divide their FD investments across multiple banks, ensuring that no single bank disburses interest exceeding ₹1 lakh.

 

For example, Mr. Sharma, aged 68, plans to invest Rs 20 lakh at an 8% annual interest rate. A single fixed deposit would generate Rs 1.6 lakh in interest, attracting TDS. However, by splitting the investment into two Rs 10 lakh FDs across two banks, he could earn Rs 80,000 in interest from each bank, keeping his interest income below the Rs 1 lakh threshold and avoiding TDS deductions.

 

Additionally, opting for monthly or quarterly interest payouts instead of a cumulative reinvestment structure could help senior citizens manage their taxable interest accruals more efficiently, thereby preventing breaches of the threshold.

 

"In case a senior citizen expects to earm more than the minimum threshold that attracts TDS, the simplest option would be to obtain a lower withholding tax certificate from the income tax department. However, in case the senior citizen doesn't want to go through the same process, he may divide his interest income among a few banks in such a way that his earnings from every bank shall be lower than the amount that attracts TDS. For example, if Mr. X expects interest income of 5 lakh, he may divide his FDs kept in 5 bank in such a manner that his interest income from each of the banks is lower than or equal to Rs. 1 lakh," said  SR Patnaik, Partner (head - taxation), Cyril Amarchand Mangaldas.

 

Key Takeaways

While the increase in the TDS threshold for senior citizens is a welcome change, it is crucial for taxpayers to understand that this is merely an administrative adjustment and does not alter the fundamental tax obligations. Senior citizens must:

 

• Disclose all interest income in their annual ITR.
• Be aware of penalties for underreporting income.
• Consider filing Form 15H if their total taxable income is below the basic exemption limit.
• Engage in strategic financial planning, such as diversifying fixed deposits across multiple banks, to avoid TDS deductions.