Finance Minister Nirmala Sitharaman announced significant TDS threshold increases in her Budget 2026 speech, with senior citizens' TDS limit doubled from ₹50,000 to ₹1 lakh and general TDS threshold raised from ₹40,000 to ₹50,000. According to PTI, these changes aim to reduce compliance burdens and benefit small taxpayers. The minister also proposed raising the annual TDS limit on rent from ₹2.4 lakh to ₹6 lakh, while TCS threshold for remittances under RBI's Liberalized Remittance Scheme is increased from ₹7 lakh to ₹10 lakh. Additionally, TCS on education remittances financed by specified financial institution loans will be removed, providing relief to students and parents.
Fixed deposit interest is treated as 'Income from Other Sources' under income tax rules and gets added to your total annual income for taxation. According to reports from Mint, if you invest ₹10 lakh in a bank FD offering 7.5% annual interest, you expect to earn ₹75,000 as interest. However, only ₹67,500 reaches your account due to 10% TDS deduction by the bank. This 10% deduction is not necessarily the final tax on your FD income, as the interest is taxed at your slab rate. The tax treatment of accrued interest depends on the type of financial instrument and the accounting method used. For most individual taxpayers, interest on fixed deposits is taxable on an accrual basis, meaning it must be declared as income even if it has not been received in cash.
Under the new tax regime for FY 2025-26, the slabs are: up to ₹4 lakh: Nil, ₹4 lakh to ₹8 lakh: 5%, ₹8 lakh to ₹12 lakh: 10%, ₹12 lakh to ₹16 lakh: 15%, ₹16 lakh to ₹20 lakh: 20%, ₹20 lakh to ₹24 lakh: 25%, and above ₹24 lakh: 30%. As reported by Mint, if you fall in the 30% tax bracket, the interest earned from your FD will be taxed at 30% plus cess. In the example scenario, while the bank deducted only ₹7,500 as TDS, your final tax liability on ₹75,000 could exceed ₹22,000.
Banks deduct TDS on FD interest when total interest exceeds certain limits in a financial year. According to Mint, for regular depositors, TDS applies when total FD interest from a bank exceeds ₹40,000 in a financial year, while for senior citizens aged 60 years and above, the threshold is ₹50,000. If the total interest remains below these limits, no TDS is deducted. The standard TDS rate on FD interest is 10% if your PAN is linked with the bank account, but if PAN is not submitted or not linked properly, banks can deduct TDS at 20%.
A critical rule many depositors overlook is that FD interest is taxable on an accrual basis, meaning you are liable to pay tax on interest earned every financial year, even if the FD matures after several years. As reported by Mint, if you have a 5-year cumulative FD, the bank calculates accrued interest each year and reports it for taxation purposes annually. This means you pay tax on the interest earned even if it has not yet been paid out. The tax treatment of accrued interest depends on the type of financial instrument and the accounting method used. For most individual taxpayers, interest on fixed deposits is taxable on an accrual basis, meaning it must be declared as income even if it has not been received in cash. For borrowers, interest deductions on loans are available only when interest is actually paid, not merely accrued.
Post office term deposits are taxable in a similar manner, with interest on 1-year, 2-year, and 3-year post office deposits being fully taxable according to your slab rate. According to Mint, 5-year post office time deposits additionally qualify for deduction under Section 80C, subject to the overall limit of ₹1.5 lakh. For eligible taxpayers, Form 15G and Form 15H can help avoid TDS on FD interest altogether. Form 15G is for individuals below 60 years whose total taxable income is below the basic exemption limit, while Form 15H is for senior citizens whose final tax liability for the year is nil.
