Is interest income taxable under New Tax Regime for senior citizens? Key details here

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)