Budget 2025 – Are Bank Fixed Deposits Up to Rs.1.5 Cr Tax-Free?

Considering the recent changes in the new tax regime during the Budget 2025, one of my blog readers asked “Are Bank Fixed Deposits Up to Rs.1.5 Cr Tax-Free?”.

When I recently wrote the article “Budget 2025 -Whether Rental Income up to Rs.20 lakh is tax-free?“, a blog reader commented by asking the above-shared question. Hence, thought to write a detailed post on this.

Budget 2025 – Taxation and TDS of Bank FDs

Fixed Deposits (FDs) are a popular way to save money in India, offering a safe place to park your funds while earning interest. However, it’s important to understand how the interest earned from these deposits is taxed.

Taxation of FD Interest:

• Taxable Income: The interest you earn from an FD is considered part of your taxable income. This means it gets added to your total earnings for the year and is taxed according to the income tax slab you fall into.
• Tax Deducted at Source (TDS): Banks are required to deduct tax at the source on the interest you earn from your FDs. This is known as TDS.

TDS Thresholds:

• For General Citizens: Previously, if the total interest earned from all your FDs in a financial year exceeded Rs.40,000, banks would deduct TDS at 10%.
• For Senior Citizens (aged 60 and above): The earlier threshold was Rs.50,000.

Changes Introduced in Budget 2025:

The Union Budget 2025 has proposed the following changes, effective from April 1, 2025:

• Increased TDS Threshold for General Citizens: The limit has been raised from Rs.40,000 to Rs.50,000. This means banks will now deduct TDS only if your total FD interest in a financial year exceeds Rs.50,000.
• Significant Increase for Senior Citizens: For senior citizens, the TDS threshold has been substantially increased from Rs.50,000 to Rs.1,00,000.

Avoiding TDS Deduction:

If your total income is below the taxable limit, you can prevent TDS deduction by submitting certain forms to your bank:

• For individuals below 60 years of age, submit Form 15G.
• For Senior Citizens: Submit Form 15H.

By providing these forms, you declare that your income is below the taxable threshold (BASIC EXEMPTION LIMIT but not Rs.12 lakh due to Sec.87A deduction) limit which is Rs.2.50,000 under the old tax regime and Rs.4,00,000 under the new tax regime, and banks will not deduct TDS on your FD interest.

It’s better to report your FD interest income every year instead of waiting until maturity. If you delay, the accumulated interest might push you into a higher tax bracket, leading to a higher tax liability.

However, do remember that avoiding TDS does not mean avoiding Tax.

Budget 2025 – Are Bank Fixed Deposits Up to Rs.1.5 Cr Tax-Free?

Now you understand the concept of taxation of Bank Deposits. Now the answer to “Are Bank Fixed Deposits Up to Rs.1.5 Cr tax-free?” is – YES and NO.

The answer is YES..If –

• We assume the FD rates of up to 7.25%.
• We assume that FD is cumulative.
• We assume the FD interest compounding frequency is on a quarterly basis.
• We assume you have no other income (income from salary, annuity, capital gains, or business or professional income).
• You are opting for the new tax regime (effective from 1st April 2025).

If the above conditions are met, then yes, Bank FD of up to Rs.1.5 Cr is tax-free. If you deposit a year’s Bank FD with an interest rate of 7.25% and compounding on a quarterly basis the year-end interest accrual is Rs.11,17,425. This is well within Rs.12 lakh income and hence the whole interest is tax-free for you under the new tax regime (subject to the above-mentioned conditions).

But do remember that as your interest income in a year is more than Rs.50,000 (for non-seniors) and Rs.1,00,000 (for senior citizens), banks will deduct the TDS. Also, as your income is more than the basic exemption limit under the new tax regime (Rs.4 lakh), you are not eligible to submit either Form 15G or Form 15H. Hence, banks will deduct the TDS and you have to file an ITR and claim this TDS amount later.

Because of this, parking money in Bank FD may be lucrative for those who are looking for safety, whose income from all other sources is well below Rs.12 lakh, and looking for a constant stream of income (especially for retirees).

Do remember that this is the best option for the category investors mentioned above. For others, just because FDs below Rs.12 lakh a year interest income is tax-free does not mean parking in an FD (especially if your goals are long-term) is best. Because of low interest, you will end up devaluing your own money. For long-term goals, the combination of equity and debt is a must.