Senior citizens will need to pay tax on their interest income only if it crosses Rs50,000 in a financial year, according to the Union budget unveiled on Thursday. The current threshold is Rs10,000.

Fixed deposits with banks and post offices, as well as recurring deposits are among the preferred investment instruments for many senior citizens, classified as individuals above 60.

What’s more, the budget has also ended the current practice of tax deduction at source (TDS) on interest income earned by senior citizens. Currently, TDS is deducted on deposits at the rate of 10%. In cases where tax liability is more than the TDS, the account holder will have to pay the difference.

Towards this, the Finance Bill will insert a new section, 80TTB, in the Income-Tax Act relating to this deduction of interest on deposits made by senior citizens. Interest income from a deposit with a bank, co-operative bank or post office will come under this section.

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Those with corporate fixed deposits will not get the benefit of this exemption.

What does it mean for a senior citizen? “Two things—increase in exemption limit and TDS—are relevant moves for senior citizens. If you take the current interest rate, which is in the 7-7.5% per annum on bank FDs, if you have Rs7.5 lakh-Rs8 lakh as FD then you get this benefit," said Vishal Dhawan, a Mumbai-based financial planner. Bank FD rates for senior citizens are 25-75 basis points (bps) higher than the interest rate for others.

“Usually senior citizens prefer fixed deposits to market-linked products. The measure is targeted at only a small portion of the citizens. It is good that it is also targeted at the upper middle-class segment because you need to have a deposit of Rs7.5 lakh in the account to get this benefit," said Naveen Kukreja, co-founder and CEO,

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Financial planners say you will have to compare the tax arbitrage with corporate fixed deposits. Currently, bank FDs pay 100-200 basis points lower interest than corporate FDs. One basis point is one-hundredth of a percentage point.

“Senior citizens who are looking at corporate FDs, they will have to adjust for the tax arbitrage on corporate deposit versus bank deposit. To ensure the tax arbitrage, they should not end up going to lower rated corporate FD where the risk is higher," said Dhawan.

The amendment will take effect from 1 April 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.