Investing After Retirement: Know How Senior Citizens Can Avoid Paying TDS On Interest Income From Fixed Deposits

Finance Minister Nirmala Sitharaman presented the Union Budget for 2025 earlier this month. Sitharaman proposed increasing the TDS (Tax Deducted at Source) threshold for senior citizens' interest income earned from bank FDs (fixed deposits).

Sitharaman proposed that interest income from fixed deposits up to Rs 1 lakh for one financial year will become TDS exempt from FY26. However, if the annual interest amount crosses Rs 1 lakh the senior citizen will then have to pay the TDS applicable on their interest income.

How Can Senior Citizens Avail The TDS Benefit

Senior citizens can use the increase in the TDS threshold by optimising their investments. In order to do so they can invest money in Fixed Deposits in such a manner that their total interest income remains under Rs 1 lakh.

Senior citizens should note that if their total taxable income is lower than the basic exemption limit of Rs 3 lakh per annum, they are eligible for relief from TDS under the old tax regime. Senior citizens can ensure that the banks do not deduct TDS by submitting Form 15H.

Investing In Multiple Fixed Deposit Accounts

Senior citizens can divide the money they wish to invest in Fixed Deposits in multiple accounts in such a manner that the total money disbursed does not exceed Rs 1 lakh. Typically banks and Non Banking Financial Companies offer Fixed Deposits with interest rates ranging between 2.5 to 9.50 per cent per annum for senior citizens for tenures ranging from 7 days to 10 years.

If a senior citizen called ‘A’ wishes to invest Rs 20 lakh in a fixed deposit with an interest rate of 8 per cent per annum. He would get Rs 1.6 lakh in interest.

On the other hand, if the principal amount of Rs 20 lakh is split into two fixed deposit accounts of Rs 10 lakh each, he would get Rs 80,000 in interest from each bank. This will help A in avoiding TDS deductions as the interest income from one account will remain less than Rs 1 lakh.

Adjust The Principal Amount to avoid a TDS Deduction

Senior Citizens can opt for fixed deposits which pay cumulative interest once the fixed deposit matures. They can make the interest income for the first year TDS free by calculating their estimated interest income beforehand.

If ‘A’ invests Rs 12 lakh in a fixed deposit with an interest rate of 8 per cent per annum with a maturity of 1 year, A will get Rs 98,919 as interest in one year which is less than the Rs 1 lakh limit. In this case, TDS will be deducted from the second year as the interest income will exceed the Rs 1 lakh threshold with the increased principal amount. The principal amount will increase in the second year because the interest income from the first year will be added to the principal.

The principal amount for each year will continue to grow accordingly and interest will be paid each year on the new principal amount.

Opt For A Pay Out Type FD

Senior citizens can also opt for a ‘pay-out’ type fixed deposit. In pay-out type FDs the interest income earned on the principal amount is paid out to the investor at fixed regular intervals instead of a single payout which is paid at the time of maturity. The payout can be made monthly, quarterly or annually. If senior citizens opt for such a fixed deposit account the TDS will not be deducted as the principal and interest amount will remain the same throughout the tenure of the fixed deposit.

To conclude, while the proposed increase of the TDS threshold can help senior citizens it does not change their tax obligations. To ensure compliance with tax norms, senior citizens should disclose their interest income in their Income Tax Returns. Additionally, they can also consult a financial planner or retirement planner to help them reduce their TDS burden strategically.