Pankaj Menon (an illustrative profile), 66, retired in Kochi, lives on a ₹3 lakh pension, interest from ₹40 lakh of bank FDs split equally across two banks, and ₹30 lakh in the Senior Citizens' Savings Scheme (SCSS). Every year both banks and the post office deduct tax, and every year he waits months for a refund. He has heard that Forms 15G and 15H have changed and is not sure what to submit.
For many families, and especially retirees, interest and dividends are the largest part of investment income. Both are taxed at slab rate, and both come with tax deducted at source. Understanding the difference between TDS and actual tax saves both money and notices.
In this chapter
- How interest and dividends are taxed, including the accrual rule
- How TDS works, and why it is not your final tax
- The new Form 121, which replaced Forms 15G and 15H
- A retiree's full calculation, and when advance tax is due
Interest income: taxed at slab, as it accrues
Interest from bank and company deposits, bonds, NSC, SCSS, POMIS and recurring deposits is added to your income and taxed at your slab rate. The key rule is accrual: interest is taxable in the year it is earned, not the year you receive it. For a cumulative FD, interest is reinvested and paid only at maturity, but it is still taxable each year.
For example, ₹5 lakh in a cumulative FD at an illustrative 7% compounded quarterly earns about ₹35,930 in year one, ₹38,510 in year two and ₹41,280 in year three. Each year's figure is taxable in that year. Banks report it in your Annual Information Statement, so ignoring it until maturity invites a mismatch.
| Income | How it is taxed |
|---|---|
| Bank, company and post office deposit interest | Slab rate, on accrual |
| Savings account interest | Slab rate; a small deduction exists under the old regime |
| SCSS, NSC, POMIS interest | Slab rate |
| PPF interest | Exempt |
| EPF interest | Exempt, except on employee contributions above the annual limit |
| Dividends and mutual fund IDCW | Slab rate |
Dividends and IDCW
Dividends from shares and the IDCW (income distribution cum capital withdrawal) option of mutual funds are taxed at your slab rate. The company or fund deducts 10% TDS once the dividend paid to you crosses ₹10,000 in a year. For someone in the 30% slab, ₹20,000 of IDCW costs ₹6,240 in tax with cess, every year. Whether the growth option with a withdrawal plan suits you better is worked through in how mutual funds are taxed.
How TDS works
TDS (tax deducted at source) is tax the payer deducts before paying you and deposits against your PAN. It is credited against your final tax when you file. If your slab is higher than the TDS rate, you pay the balance; if your total tax is lower, you get a refund.
| Payment | TDS threshold (per payer, per year) | TDS rate with PAN |
|---|---|---|
| Bank and post office deposit interest, below 60 | ₹50,000 | 10% |
| Bank and post office deposit interest, 60 and above | ₹1 lakh | 10% |
| Dividends from shares and mutual funds | ₹10,000 | 10% |
Take a 45-year-old in the 30% slab with ₹80,000 of FD interest from one bank. TDS is ₹8,000. Actual tax is ₹80,000 × 30% × 1.04 = ₹24,960, so ₹16,960 more is due when filing.
Form 121: the new nil-tax declaration
From tax year 2026-27, under the Income-tax Rules, 2026, a single Form 121 replaces the old Forms 15G and 15H. It is a declaration to the payer that the tax on your estimated total income for the year will be nil, so no TDS should be deducted. For those below 60, an additional condition applies: the total of the specified incomes must not exceed the amount not chargeable to tax. For those 60 and above, only the nil-tax condition applies. Filing it when your tax will not be nil is a false declaration.
Worked example: Pankaj's year
Inputs: pension ₹3 lakh; ₹20 lakh FD in each of two banks at an illustrative 7.25%; ₹30 lakh in SCSS at 8.2% (the October–December 2026 rate). New regime unless stated.
- FD interest: ₹40 lakh × 7.25% = ₹2.9 lakh, or ₹1.45 lakh per bank.
- SCSS interest: ₹30 lakh × 8.2% = ₹2.46 lakh.
- Total income: ₹3 lakh + ₹2.9 lakh + ₹2.46 lakh = ₹8.36 lakh.
- Taxable income: ₹8.36 lakh − ₹75,000 standard deduction on pension = ₹7.61 lakh, below ₹12 lakh, so tax is nil under the new regime.
- Old regime for comparison: after the ₹50,000 standard deduction and the ₹50,000 senior citizen interest deduction, taxable income is ₹7.36 lakh and tax is about ₹59,500 with cess. The new regime is clearly better for him.
- TDS without Form 121: each bank's interest (₹1.45 lakh) and the SCSS interest (₹2.46 lakh) exceed the ₹1 lakh senior threshold, so 10% is deducted: ₹14,500 per bank and ₹24,600 on SCSS, ₹53,600 in all, which he would recover only as a refund.
- With Form 121: since his final tax is nil, he can submit it to both banks and the post office at the start of the year and receive full interest.
Advance tax
If your tax due after TDS is ₹10,000 or more for the year, advance tax is payable in instalments: at least 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March. Resident senior citizens without business income are exempt. Large interest or a big capital gain is the commonest reason salaried people fall short, and interest is charged on shortfalls.
Common mistakes to avoid
- Declaring cumulative FD interest only at maturity: it is taxable every year as it accrues.
- Thinking TDS settles the tax: higher-slab investors owe the balance at filing.
- Filing Form 121 when tax is not nil: it is a false declaration and can attract penalties.
- Choosing IDCW for "regular income" in a high slab: a systematic withdrawal from the growth option is often more tax-efficient.
- Ignoring savings account interest: it is taxable and appears in your AIS.
Try this yourself: List every deposit and bond you hold with its yearly interest, grouped by bank or payer. Add pension or other income and estimate your tax under both regimes. If it is nil, prepare Form 121 for each payer before the first interest credit; if not, check whether TDS covers your tax or advance tax is due. For retirees, our guide to senior citizen tax planning goes further.
Frequently asked questions
Is FD interest taxable if TDS has already been deducted?
Yes. TDS is an advance payment, not the final tax. Your FD interest is added to your income and taxed at slab rate; the TDS is credited against it, and you pay any balance or claim a refund.
What replaced Form 15G and 15H?
From tax year 2026-27, Form 121 under the Income-tax Rules, 2026 replaces both. It works the same way: a declaration that your tax for the year will be nil, so payers do not deduct TDS.
How much FD interest is tax-free for senior citizens?
No fixed amount of interest is tax-free in itself. Under the old regime, seniors can deduct up to ₹50,000 of deposit interest; under the new regime, the rebate makes total taxable income up to ₹12 lakh tax-free. TDS applies above ₹1 lakh of interest per payer unless Form 121 is filed.
Do I have to pay advance tax on FD interest?
Yes, if your total tax for the year after TDS is ₹10,000 or more, and you are not a resident senior citizen without business income. Interest above the TDS rate, for example in the 30% slab, is the usual cause, so add it to your June and September instalment estimates.
For rent alongside interest, see rental income tax, and for retirement income choices, the Retirement Planning module.