Most people who earn interest from a savings account or a fixed deposit assume the bank already "handles the tax" once TDS is cut. It doesn't. TDS is only an advance payment toward your final tax bill — the actual tax you owe on interest income depends on your total income, your tax slab, and which deductions you're entitled to claim. Getting this wrong is one of the most common reasons people either overpay or get a notice later. This guide walks through how interest income is actually taxed, what changed in TDS rules last year, and a genuinely major shift in India's tax law that's already in effect right now.
Interest income covers any money you earn just for lending your money to someone else, or for keeping it deposited somewhere that pays you a return on it. In practice, this includes:
A few things that sound like "interest" but are treated differently for tax purposes: interest from the Public Provident Fund (PPF) and the Sukanya Samriddhi account is fully tax-exempt, and interest from your Employees' Provident Fund (EPF) is exempt up to a specified contribution limit, with interest on contributions above that limit taxable in your hands.
Interest income doesn't get its own special tax rate. It's added to your other income — salary, business income, rent, whatever else you earn — and taxed as part of your total income under the head "Income from Other Sources." Whatever slab your total income falls into, that's the rate applied to your interest income as well.
This is worth repeating because it trips a lot of people up: if you're in the 30% tax bracket, your interest income is taxed at 30%, not at whatever rate the bank quoted you when the FD was opened. The bank only deducts TDS at a flat 10% (or 20% without PAN) — that's not your final tax liability, just an advance collected on the government's behalf. You settle the actual amount owed, one way or the other, when you file your return.
This is the single most important thing to understand about Indian tax law right now, and it affects every section number you might have seen referenced anywhere online, including on older pages about interest income.
The Income Tax Act, 1961 — the law that governed Indian taxation for over six decades and had been amended thousands of times — was formally replaced by the Income Tax Act, 2025, effective 1 April 2026. This isn't a change to tax rates or how much you owe; it's a rewrite of the law's structure to make it easier to read and administer. The Act now has 536 sections across 23 chapters, down from the sprawling, heavily-amended 1961 version. The familiar "Previous Year" and "Assessment Year" concepts have also been replaced with a single, simpler idea: the Tax Year, running from 1 April to 31 March, same as before, just with one name instead of two.
Here's the part that actually matters for someone earning interest income today:
The rates, exemption limits, and deduction amounts themselves haven't changed because of this — only where they live in the statute has. But if you're reading older tax content (or even this page a year from now) and it mentions Section 80TTA or Section 194A, it's worth knowing those numbers now belong to the old Act and have been renumbered under the new one, as covered below.
Under the old Act, TDS on interest (other than interest on listed securities) was governed by Section 194A. Effective 1 April 2025, the government raised the TDS thresholds meaningfully:
The TDS rate itself stayed the same: 10% if you've furnished your PAN, 20% if you haven't. Below the applicable threshold, no TDS is deducted at all — though the interest is still fully taxable and still needs to be reported in your return.
Under the new Income Tax Act, 2025, all TDS provisions that used to be spread across separate sections (192 through 196D, including the old 194A) have been consolidated into a single section — Section 393 — with different sub-clauses covering each type of payment. The threshold amounts and 10%/20% rate structure carried over unchanged; only the section number and the way it's organised in the statute is different.
Under the old Act, there were two separate deductions for interest income:
Under the Income Tax Act, 2025, these two provisions have been merged into a single Section 153 ("Deduction for savings bank interest on deposits"), with the same ₹10,000 / ₹50,000 limits carried over based on whether you're a senior citizen or not.
There's a catch that matters more than the section number, though: this deduction is only available if you opt for the old tax regime. Under the default new tax regime, almost all Chapter VI-A style deductions — including this one — aren't available at all. If most of your income is interest and you're used to claiming ₹10,000 or ₹50,000 off the top through this deduction, it's worth actually running the numbers under both regimes before assuming the new regime's lower slab rates automatically work out better for you.
Since the new tax regime is now the default, and 80TTA/80TTB-style deductions aren't available under it, this comparison is genuinely relevant if interest makes up a meaningful share of your income.
New tax regime (default) — slabs for the current financial year:
Under the new regime, a rebate (up to ₹60,000) brings your effective tax down to zero if your total taxable income is up to ₹12 lakh — salaried individuals get a further ₹75,000 standard deduction on top, effectively pushing that zero-tax point to around ₹12.75 lakh, though this standard deduction doesn't apply if your income is purely from interest and other non-salary sources.
Old tax regime (optional): Retains the older slab structure (nil up to ₹2.5 lakh, 5%, 20%, 30% bands) but allows the full range of Chapter VI-A deductions — Section 80C investments, 80D health insurance, home loan interest, and the Section 153 (formerly 80TTA/80TTB) interest deduction among them. Its rebate under Section 87A caps out at ₹12,500 for income up to ₹5 lakh — far lower than the new regime's threshold.
If your total income sits comfortably under ₹12 lakh, the new regime is very likely the simpler and cheaper option regardless of the interest deduction you'd be giving up. If you're closer to or above that threshold and have significant 80C, 80D, or home loan interest claims alongside your interest income, it's worth actually calculating both ways rather than assuming.
If your total income for the year is below the basic exemption limit and no tax is actually going to be payable, you don't have to let the bank deduct TDS and then claim it back at return-filing time. Submitting Form 15G (for individuals below 60) or Form 15H (for senior citizens, 60 and above) to the bank at the start of the financial year — or whenever a new FD is opened — declares that your income doesn't cross the taxable threshold, and the bank won't deduct TDS on the interest it credits you.
This only works if you genuinely won't have taxable income for the year — submitting it when you actually do owe tax doesn't reduce your final liability, it just shifts the burden of paying that tax to when you file your return, sometimes with interest for underpayment along the way.
Interest income is reported under "Income from Other Sources" in your income tax return, whichever ITR form applies to you based on your overall income profile. A few practical points:
Interest income looks simple until you're trying to work out whether the old or new tax regime saves you more, whether TDS was correctly deducted across every bank you hold an account with, or how a rule you read about under an old section number actually applies today. Our team at LegalDev reviews your interest income across all your accounts and investments, checks it against your AIS and Form 26AS, works out which tax regime genuinely benefits you, and files an accurate, complete return — so you're not leaving a refund on the table or under-reporting something the department already has on record.
Talk to our team about filing your return, or get a free consultation to check whether the old or new tax regime works out better for your interest income.
Yes. Interest from savings accounts, fixed deposits, recurring deposits, bonds, and most other sources is taxable under "Income from Other Sources," added to your total income and taxed at your applicable slab rate. PPF and Sukanya Samriddhi interest are exceptions and remain fully exempt.
Since 1 April 2025, banks and post offices deduct TDS once your interest crosses ₹50,000 a year (₹1,00,000 a year for senior citizens), at a rate of 10% with PAN or 20% without it. Interest from non-bank payers has a lower ₹10,000 threshold.
Yes, but only if you opt for the old tax regime. The deduction (up to ₹10,000, or ₹50,000 for senior citizens, who can also include FD/RD interest) used to sit under Section 80TTA and Section 80TTB; under the Income Tax Act, 2025, both have been merged into a single Section 153. It isn't available under the default new tax regime.
Because India replaced the Income Tax Act, 1961 with a new Income Tax Act, 2025, effective 1 April 2026, which reorganised the entire law into a cleaner structure without changing tax rates or deduction amounts. Section 80TTA/80TTB is now Section 153, and Section 194A's TDS rules are now part of the consolidated Section 393.
Submit Form 15G (if you're under 60) or Form 15H (if you're a senior citizen) to your bank, declaring that your total income is below the taxable threshold. This should be done at the start of the financial year or whenever a new deposit is opened.
You claim credit for the TDS already deducted when filing your return, and if your actual tax liability turns out lower, you receive the excess as a refund.
Yes, it's taxable as "Income from Other Sources," even though it's easy to overlook since it doesn't come with a Form 16A the way bank interest often does. It shows up on your Annual Information Statement and should be included when filing.