Is Income From Interest Taxable Under The New Tax Regime For FY2025-26?

When pension security is not available, senior citizens typically rely on monthly interest income from fixed deposits (FDs). However, with the changes in income-tax rules this year in the Budget 2025, it is important to understand the tax treatment of interest income and plan accordingly. From financial year (FY) 2023-24, the government made the new tax regime the default choice. If one wants the old tax regime, one needs to specifically opt for it. From this year (FY2025-26), the income is tax-free up to Rs 12 lakh under the new regime, and the rebate under Section 87A of the Income-tax Act, 1961, is Rs 60,000, which was previously Rs 25,000.

What Is The Tax Liability On Interest Income Under The New Regime In FY 2025–26?

The interest income is treated under the ‘Income from other sources’ head for taxation purposes under the Income-tax Act, 1961, and therefore, there is confusion whether it is covered under the Rs 12 lakh limit to ascertain the tax liability.

CA Mrinal Mehta, Joint Secretary, Bombay Chartered Accountants' Society (BCAS) clarifies, “The interest income is taxable under the New Tax Regime like any other income”, and further quips, “If your total income (including interest) is less than Rs 12 lakhs during the FY2025-2026, you get a tax rebate under Section 87A. The rebate cannot be adjusted against tax on Long Term Capital Gains on sale of equity shares or mutual funds, or any other income with special rates of tax.”

Section 87A: Under this section, one can avail of a rebate of Rs 60,000 under the new regime on an income up to Rs 12 lakh for FY2025-26.

“A rebate under Section 87A is a deduction from tax payable and not a deduction in total income. Hence, the limit of Rs 60,000 applies to tax amount payable and not to total income”, says Mehta.

Note that the rebate is applied on the total tax payable before adding cess, and it cannot be more than the tax payable. It means the tax relief will be available on the lower of the two: the rebate amount or the tax payable.

How Is Interest Income Treated For Tax Rebate Under Section 87A?

Let us take an example of a senior citizen having no other source of income except interest income. The senior invested in Senior Citizens Savings Scheme (SCSS) and other FDs after retirement and started receiving an interest amount of around Rs 22,000 per month. Will this income be taxable in the new tax regime for FY2025-26, since it exceeds the 87A limit of Rs 60,000?

CA Shefali Mundra, Tax Expert at ClearTax,  a tax-filing platform says, “If a senior earns Rs 22,000 per month in interest income (Rs 2,64,000 annually) and has no other income, their total income remains below Rs 12 lakh. Thus, they will be eligible for a full rebate under Section 87A, resulting in zero tax liability."

Let's take another example where a senior earns a monthly pension of Rs 50,000 along with the interest income of Rs 22,000. What will be the tax liability under the new tax regime in FY2025-26 and FY2024-25?

“For FY2025-26, the total income from pension (Rs 6 lakhs) and interest (Rs 2.64 lakhs) does not exceed the threshold limit of Rs 12 lakhs for the benefit of tax rebate, and hence, NO tax is payable.

However, for FY 2024-25, the total income from pension (Rs. 6 lakhs) and interest (Rs 2.64 lakhs) exceeds the threshold limit of Rs 7 lakhs for the benefit of tax rebate. Hence, tax will be payable under the new regime as per the slab rates”, explains Mehta.

This makes four points clear about interest income taxation:

• Interest income is eligible for the Section 87A rebate. So, one should include interest income in the total taxable income to determine the eligibility for a rebate under this Section

• Section 87A rebate is not available on Long Term Capital Gains (LTCG) on sale of equity shares or mutual funds, or any other income with special rates of tax

• For FY2025-26, this income limit to avail of Section 87A benefit is Rs 12 lakh (Rs 7 lakh for FY2024-25) under the new tax regime

• The New Tax Regime does not offer a deduction of Rs 50,000 under Section 80TTB on bank interest.