Interest Income from FDs, Savings Accounts & Bonds: How It's Taxed in AY 2026-27

Interest earned on your savings — whether from fixed deposits, savings accounts, recurring deposits, or bonds — is fully taxable in India. Yet many taxpayers either forget to report it or don't understand how TDS on these instruments works, leading to notices from the Income Tax Department.

This guide covers exactly how interest income is taxed for FY 2025-26 (AY 2026-27), the deductions available under Sections 80TTA and 80TTB, TDS rules, and how to report everything correctly in your ITR.

Which Interest Income Is Taxable?

Almost all interest income is taxable under the head "Income from Other Sources" in your ITR. This includes interest from:

• Savings bank accounts (all banks, including cooperative banks)
• Fixed deposits (FDs) — bank FDs and company FDs
• Recurring deposits (RDs)
• Post office deposits (except specific exemptions)
• Corporate bonds and debentures
• Government securities and bonds
• Income tax refund (yes, interest on your refund is taxable too)

What About Tax-Free Bonds?

Interest from certain government-notified tax-free bonds (like those issued by NHAI, REC, IRFC, and PFC) is exempt under Section 10(15). You don't need to include this interest in your taxable income, but you should still disclose it in the exempt income schedule of your ITR for transparency.

Post Office Schemes

Interest from Post Office Savings Accounts is exempt up to Rs 3,500 per year (Rs 7,000 for joint accounts) under Section 10(15)(i). Interest beyond this limit is taxable. For other post office schemes like the Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits, interest is fully taxable.

How Is Interest Income Taxed?

Interest income is added to your total income and taxed at your applicable slab rate. There is no special or concessional rate for interest income (unlike long-term capital gains which have their own rates).

Example: Salaried Person with FD Interest

Suppose Priya earns Rs 9,00,000 as salary and Rs 85,000 as FD interest during FY 2025-26.

Under the new tax regime, Priya would not get the 80TTA deduction, but the standard deduction of Rs 75,000 still applies. Under the old regime, she can claim both.

Section 80TTA: Deduction on Savings Account Interest

Section 80TTA allows individuals and HUFs (below 60 years) to claim a deduction of up to Rs 10,000 on interest earned from:

• Savings accounts with banks
• Savings accounts with cooperative societies
• Savings accounts with post offices

Key Points About 80TTA

• The Rs 10,000 limit applies to the combined savings account interest from all your bank accounts
• It does not cover interest from fixed deposits, recurring deposits, or bonds
• Available only under the old tax regime
• If your savings account interest is Rs 7,000, your deduction is Rs 7,000 (not Rs 10,000)

Section 80TTB: Higher Deduction for Senior Citizens

If you are a senior citizen (aged 60 or above), Section 80TTB offers a more generous deduction of up to Rs 50,000 on interest income. Unlike 80TTA, this section covers interest from:

• Savings accounts
• Fixed deposits
• Recurring deposits
• Post office deposits

80TTA vs 80TTB: Quick Comparison

Important: You cannot claim both 80TTA and 80TTB. Senior citizens should claim 80TTB as it offers a higher limit and broader coverage.

TDS on Interest Income: Rules for FY 2025-26

Banks and financial institutions deduct TDS on interest income when it exceeds certain thresholds. Understanding TDS rules helps you avoid surprises when filing.

TDS Thresholds

When TDS Is Deducted at 20%

If you haven't provided your PAN to the bank or financial institution, TDS is deducted at 20% instead of 10%. Always ensure your PAN is linked to all your deposit accounts.

No TDS Doesn't Mean No Tax

A common mistake: if your FD interest is Rs 35,000 at a single bank (below the Rs 40,000 threshold), no TDS is deducted. But the interest is still fully taxable. You must report it in your ITR and pay tax at your slab rate.

Similarly, if you have FDs across multiple banks — say Rs 30,000 interest from Bank A and Rs 25,000 from Bank B — neither bank deducts TDS (each is below Rs 40,000), but your total interest of Rs 55,000 is taxable and must be reported.

Form 15G and 15H: Avoiding TDS

If your total income is below the taxable limit, you can submit:

• Form 15G — for individuals below 60 years whose tax liability for the year is nil
• Form 15H — for senior citizens (60+) whose tax liability for the year is nil

These forms tell the bank not to deduct TDS. Submit them at the beginning of each financial year to each bank where you hold deposits. Note that Form 15G/15H only prevents TDS — if your income turns out to be taxable, you still owe the tax.

Accrual vs Cash Basis: When Is FD Interest Taxable?

Interest on FDs is taxable on an accrual basis, not when you receive it. This is a critical point that many taxpayers miss.

Example: 5-Year FD with Cumulative Interest

Rajan invests Rs 5,00,000 in a 5-year cumulative FD at 7.5% interest. He receives no interest payouts during the 5 years — the entire amount (principal + interest) is paid at maturity.

Even though Rajan receives interest only at maturity, he must report the interest accrued each year as income in that year's ITR. The bank calculates and credits interest to his FD account annually, and this is the amount taxable each year.

You can find the year-wise interest breakup in:

• Your bank's annual interest certificate (usually available in the online banking portal)
• Form 26AS / AIS — which shows TDS deducted on the accrued interest

If you forget to report accrued interest for earlier years and declare it all in the maturity year, you may end up in a higher tax bracket unnecessarily and could face scrutiny.

How to Report Interest Income in Your ITR

Step 1: Gather Your Interest Details

Collect interest certificates from all banks, and cross-check against your AIS (Annual Information Statement) on the income tax portal. The AIS lists all interest income reported by banks and institutions to the tax department. If you notice any discrepancy, contact the bank and provide feedback on the AIS portal. You can read more about these statements in our guide on Form 26AS vs AIS vs TIS explained.

Step 2: Report Under "Income from Other Sources"

In your ITR (ITR-1 or ITR-2), report interest income under the "Income from Other Sources" section:

• Savings account interest — report the total across all banks
• FD/RD interest — report each bank's interest or the aggregate
• Interest on income tax refund — report separately
• Other interest (bonds, company deposits) — report under the relevant field

Step 3: Claim Deductions

Under the old tax regime, claim:

• Section 80TTA — up to Rs 10,000 on savings account interest (if below 60)
• Section 80TTB — up to Rs 50,000 on all deposit interest (if 60+)

Step 4: Verify TDS Credit

Ensure the TDS deducted by banks matches what's shown in your Form 26AS. Any mismatch means the TDS credit won't be available when processing your return, potentially reducing your refund. If there's a mismatch, contact the bank to correct their TDS filing.

49Tax automatically pulls your interest income details from your Form 16 and AIS, pre-filling these fields so you don't have to enter them manually.

Common Mistakes to Avoid

1. Not reporting interest from all bank accounts. If you have savings accounts or FDs across 4-5 banks, you must aggregate and report interest from all of them. The AIS captures this data, and the tax department will notice if you skip one.

2. Reporting FD interest only at maturity. As discussed, interest is taxable on an accrual basis. Report it year by year, not as a lump sum at maturity.

3. Confusing TDS with tax paid. TDS of 10% is just an advance collection. If your slab rate is 20% or 30%, you owe the balance tax. Don't assume TDS covers your full liability.

4. Not submitting Form 15G/15H on time. These must be submitted at the start of the financial year. If submitted late, the bank may have already deducted TDS, and you'll need to claim a refund via your ITR.

5. Ignoring interest on tax refunds. The income tax department pays interest on refunds under Sections 244A. This interest is taxable and appears in your AIS — report it under "Income from Other Sources."

Tax Planning Tips for Interest Income

• Spread FDs across family members — if your spouse or parents are in a lower tax bracket (or have no income), consider deposits in their name to reduce overall family tax. Be mindful of clubbing provisions under Section 64 — income from deposits funded by you in your spouse's name gets clubbed with your income. Deposits in parents' names don't have this issue.

• Consider tax-saving FDs — 5-year tax-saving FDs qualify for Section 80C deduction up to Rs 1.5 lakh. The interest is still taxable, but the principal amount gives you a deduction under the old regime.

• Evaluate debt mutual funds — depending on your holding period and tax bracket, debt mutual fund returns may be more tax-efficient than FD interest, especially for longer horizons.

• Use the new regime strategically — if you're in the new tax regime and your interest income is substantial, remember that 80TTA/80TTB deductions aren't available. Factor this into your regime selection decision.

Key Takeaway

Every rupee of interest income — from savings accounts, FDs, RDs, or bonds — is taxable unless specifically exempt. Report it on an accrual basis, claim 80TTA or 80TTB where eligible, verify your TDS credits against Form 26AS, and cross-check your AIS before filing. Getting this right avoids unnecessary notices and ensures you don't overpay or underpay tax.