Is interest income taxable under New Tax Regime for senior citizens? Key details here
With income up to Rs 12 lakh now eligible for a rebate under Section 87A, many senior citizens may end up paying zero tax under the new regime in FY2025-26. Interest income from fixed deposits and schemes like SCSS is fully taxable but still qualifies for the rebate.
- Jul 26, 2025,
- Updated Jul 26, 2025 10:37 AM IST
With the new tax regime becoming the default from FY2023-24 and further relaxations introduced in Union Budget 2025, senior citizens relying heavily on interest income must understand how their earnings are treated for tax purposes in FY2025-26.
When pension income is unavailable, many retirees depend on interest from fixed deposits (FDs) and government schemes like the Senior Citizens Savings Scheme (SCSS). While earlier (till FY25), the rebate under Section 87A was capped at Rs 25,000 for income up to Rs 7 lakh, the limit has now been raised significantly. For FY2025-26, income up to Rs 12 lakh qualifies for a tax rebate of up to Rs 60,000 under the new regime.
Interest income and tax liability
Interest income falls under the head "Income from other sources" as per the Income-tax Act, 1961, and is fully taxable under the new regime. However, if the total income, including interest—is under Rs 12 lakh, senior citizens can avail of the Section 87A rebate, wiping out their tax liability entirely.
It’s important to note that this rebate does not apply to Long-Term Capital Gains (LTCG) from the sale of equity shares or mutual funds, nor to income taxed at special rates. But interest income qualifies fully.
How the tax slabs look under the new regime
The revised tax slabs for FY2025-26 (AY2026-27) are:
Up to Rs 4 lakh: Nil
Rs 4–8 lakh: 5%
Rs 8–12 lakh: 10%
Rs 12–16 lakh: 15%
Rs 16–20 lakh: 20%
Rs 20–24 lakh: 25%
Above Rs 24 lakh: 30%
With a Rs 60,000 tax rebate under Section 87A, someone earning Rs 12 lakh or less can end up paying no tax under the new regime.
Interest Income Taxability for Senior Citizens (FY2025–26)
| Default Tax Regime | New Tax Regime (from FY2023–24) |
| Section 87A Rebate (FY2025–26) | ₹60,000 rebate for total income up to ₹12 lakh |
| Is Interest Income Taxable? | Yes, fully taxable under "Income from Other Sources" |
| Can Interest Income Get Section 87A Benefit? | Yes, if total income ≤ ₹12 lakh and other conditions met |
| Tax Treatment of LTCG/Equity Gains | Not eligible for 87A rebate |
| Deduction for Interest Income (80TTB) | Not allowed under new regime |
| Standard Deduction | ₹75,000 (if pension/salary income exists) |
| Medical Insurance Deduction (80D) | Not available under new regime |
| Senior Citizens Savings Scheme (SCSS) | Interest is taxable; no 80C deduction under new regime |
A practical example
Take the case of a 67-year-old retiree who earns Rs 85,000 per month solely from interest income through bank fixed deposits and the Senior Citizens Savings Scheme (SCSS). This brings their total annual income to Rs 10.2 lakh for FY2025-26.
Under the new tax regime, the applicable tax slabs would be:
0% on income up to Rs 4 lakh
5% on income between Rs 4 lakh and Rs 8 lakh = Rs 20,000
10% on income between Rs 8 lakh and Rs 10.2 lakh = Rs 22,000
Total tax before rebate: Rs 42,000
Since this total tax is below the Rs 60,000 rebate limit under Section 87A, the individual will end up paying zero income tax.
However, under the old tax regime, they could have claimed:
Standard deduction of Rs 50,000 (if pension or salary is received)
Rs 50,000 deduction under Section 80TTB for interest income
Other deductions like 80C (if invested accordingly)
Tax liabilities under Old Tax Regime
If they had significant deductions under the old regime, their taxable income could have dropped even further, potentially reducing their tax burden. But without such deductions, the new regime offers a simpler, tax-free outcome in this case.
Key Benefits Exclusive to Senior Citizens (Old Regime)
| Benefit | Details |
|---|---|
| Higher Exemption Limits | ₹3 lakh (60–79 yrs), ₹5 lakh (80+) |
| 80TTB Deduction | ₹50,000 on interest income |
| Standard Deduction (Pension/Salary) | ₹50,000 |
| Health Insurance Deduction (80D) | ₹50,000 |
| Specified Disease Deduction (80DDB) | ₹1,00,000 |
| No Advance Tax | If no business/professional income |
| ITR Exemption (75+ age) | If only pension + interest from same bank and 194P declaration filed |
| Reverse Mortgage | No capital gains tax on monthly payouts |
Final takeaway
While the new tax regime simplifies filing and offers higher rebate thresholds, it does so at the expense of deductions such as those under Sections 80C, 80D, and 80TTB. For many senior citizens, especially those relying primarily on interest income, the tax liability in FY2025-26 could be zero under either regime if income is within the rebate threshold. Still, one must carefully compare benefits under both regimes and file accordingly.
With the new tax regime becoming the default from FY2023-24 and further relaxations introduced in Union Budget 2025, senior citizens relying heavily on interest income must understand how their earnings are treated for tax purposes in FY2025-26.
When pension income is unavailable, many retirees depend on interest from fixed deposits (FDs) and government schemes like the Senior Citizens Savings Scheme (SCSS). While earlier (till FY25), the rebate under Section 87A was capped at Rs 25,000 for income up to Rs 7 lakh, the limit has now been raised significantly. For FY2025-26, income up to Rs 12 lakh qualifies for a tax rebate of up to Rs 60,000 under the new regime.
Interest income and tax liability
Interest income falls under the head "Income from other sources" as per the Income-tax Act, 1961, and is fully taxable under the new regime. However, if the total income, including interest—is under Rs 12 lakh, senior citizens can avail of the Section 87A rebate, wiping out their tax liability entirely.
It’s important to note that this rebate does not apply to Long-Term Capital Gains (LTCG) from the sale of equity shares or mutual funds, nor to income taxed at special rates. But interest income qualifies fully.
How the tax slabs look under the new regime
The revised tax slabs for FY2025-26 (AY2026-27) are:
Up to Rs 4 lakh: Nil
Rs 4–8 lakh: 5%
Rs 8–12 lakh: 10%
Rs 12–16 lakh: 15%
Rs 16–20 lakh: 20%
Rs 20–24 lakh: 25%
Above Rs 24 lakh: 30%
With a Rs 60,000 tax rebate under Section 87A, someone earning Rs 12 lakh or less can end up paying no tax under the new regime.
Interest Income Taxability for Senior Citizens (FY2025–26)
| Default Tax Regime | New Tax Regime (from FY2023–24) |
| Section 87A Rebate (FY2025–26) | ₹60,000 rebate for total income up to ₹12 lakh |
| Is Interest Income Taxable? | Yes, fully taxable under "Income from Other Sources" |
| Can Interest Income Get Section 87A Benefit? | Yes, if total income ≤ ₹12 lakh and other conditions met |
| Tax Treatment of LTCG/Equity Gains | Not eligible for 87A rebate |
| Deduction for Interest Income (80TTB) | Not allowed under new regime |
| Standard Deduction | ₹75,000 (if pension/salary income exists) |
| Medical Insurance Deduction (80D) | Not available under new regime |
| Senior Citizens Savings Scheme (SCSS) | Interest is taxable; no 80C deduction under new regime |
A practical example
Take the case of a 67-year-old retiree who earns Rs 85,000 per month solely from interest income through bank fixed deposits and the Senior Citizens Savings Scheme (SCSS). This brings their total annual income to Rs 10.2 lakh for FY2025-26.
Under the new tax regime, the applicable tax slabs would be:
0% on income up to Rs 4 lakh
5% on income between Rs 4 lakh and Rs 8 lakh = Rs 20,000
10% on income between Rs 8 lakh and Rs 10.2 lakh = Rs 22,000
Total tax before rebate: Rs 42,000
Since this total tax is below the Rs 60,000 rebate limit under Section 87A, the individual will end up paying zero income tax.
However, under the old tax regime, they could have claimed:
Standard deduction of Rs 50,000 (if pension or salary is received)
Rs 50,000 deduction under Section 80TTB for interest income
Other deductions like 80C (if invested accordingly)
Tax liabilities under Old Tax Regime
If they had significant deductions under the old regime, their taxable income could have dropped even further, potentially reducing their tax burden. But without such deductions, the new regime offers a simpler, tax-free outcome in this case.
Key Benefits Exclusive to Senior Citizens (Old Regime)
| Benefit | Details |
|---|---|
| Higher Exemption Limits | ₹3 lakh (60–79 yrs), ₹5 lakh (80+) |
| 80TTB Deduction | ₹50,000 on interest income |
| Standard Deduction (Pension/Salary) | ₹50,000 |
| Health Insurance Deduction (80D) | ₹50,000 |
| Specified Disease Deduction (80DDB) | ₹1,00,000 |
| No Advance Tax | If no business/professional income |
| ITR Exemption (75+ age) | If only pension + interest from same bank and 194P declaration filed |
| Reverse Mortgage | No capital gains tax on monthly payouts |
Final takeaway
While the new tax regime simplifies filing and offers higher rebate thresholds, it does so at the expense of deductions such as those under Sections 80C, 80D, and 80TTB. For many senior citizens, especially those relying primarily on interest income, the tax liability in FY2025-26 could be zero under either regime if income is within the rebate threshold. Still, one must carefully compare benefits under both regimes and file accordingly.