As the name indicates, a savings account is designed to incentivise people to save money and deposit it securely with a bank. It is an interest-bearing bank account that enables you to take out money anytime you need to and earn little interest.
Banks allow you to create a reliable income stream by setting an interest rate on the money you deposit. However, just as with other types of income, interest on savings accounts is subject to taxation.
Fortunately, the Indian government provides tax exemptions on this interest income to encourage people to put money in this digital safe.
Income tax on savings bank interest: How to calculate the interest on a savings account?
The Reserve Bank of India’s instructions provide that interest on savings accounts is calculated daily. The closing sum you have at the end of the day is subject to the interest rate established by the bank.
This interest amount is sent monthly, quarterly, or half-yearly, depending on the kind of account. To encourage the necessity for saving money, the RBI recommends banks make this transfer every three months.
Use the following straightforward formula to get the interest on a savings account:
Interest is calculated as Daily Closing Balance x Rate of Interest x Days x Days in a Year.
Let’s say that during June, Rahul had a daily closing balance of Rs 2 lakhs. His bank gives him a 5% yearly interest rate. Rahul will receive in interest each month:
2,00,000 x (5/100) x 30/365 = Rs 821.91 each month.
Income tax on savings bank interest: Taxed interest
The category “Income from other sources” includes the income received when funds are deposited in savings accounts. Therefore, a person must pay tax on this interest in accordance with their income tax bracket. You will only be required to pay this tax if the interest sum exceeds Rs 10,000.
In addition, deposits made into a savings account are not subject to TDS under Section 19A of the Income Tax Act. However, a TDS of 30% is required on the interest generated on a Non-Resident Ordinary (NRO) account. Interest from Non-Residential External (NRE) accounts does not currently have a TDS.
Income tax on savings bank interest: Tax benefits
The main benefits of opening a savings account is the tax advantages it offers along with providing consistent passive income Sections 80TTA and 80TTB of the Income Tax Act offer tax deductions on the interest income to assist in lowering your taxable income.
Section 80TTA
For the fiscal year 2012–2013, the Indian government added Section 80TTA to the Income Tax Act. Citizens who get interest on savings accounts might get a tax deduction of Rs 10,000 thanks to this clause. This deduction is in addition to Section 80C of the Income Tax Act refund of Rs 1.5 lakhs.
However, in order to be eligible for this deduction, you must meet the requirements listed below:
- Only those under 60, including individuals and Hindu Undivided Families, are eligible.
- Companies, groups of people, associations of people, and company assessees are not qualified to make a deduction claim.
- The interest from a savings account with a bank, cooperative bank, or post office is eligible for the deduction.
- The maximum deduction still stands at Rs 10,000 even if you have additional savings accounts.
Meanwhile, the following are not subject to Section 80TTA deductions:
- People or members of HUFs who are older than 60.
- Fixed deposits, term deposits, or recurring deposits all accrue interest.
Section 80TTB
One needs more cash on hand after the age of 60 in order to have a safe retirement. As a result, the Government of India permits a tax deduction on savings account interest of up to Rs 50,000 for older people and pensioners.
Between Section 80TTA and Section 80TTB, there is, nevertheless, an important divergence. The latter provides interest deduction on savings accounts, fixed deposits, term deposits, etc., accounts. The former, however, only permits one to deduct taxes from interest earned on savings account balances. Senior persons are not eligible for the deduction; it is only accessible to individuals and Hindu Undivided Families (HUF).
The most popular and extensively utilised type of bank account for storing funds in today’s modern banking environment is a savings account. It gives interest on the money placed in addition to keeping your money secure. Additionally, Section 80TTA of the Income Tax Act allows for a deduction of the tax on savings account interest.
FAQs
How much of the interest may I deduct from my taxes?
The Income Tax Act's Section 80TTA allows for a maximum tax deduction of Rs 10,000 on interest earned on savings accounts. This is a predetermined aggregate limit that won't alter no matter how many savings accounts a person opens.
What is TDS?
Tax is immediately withdrawn from a person's source of income when they receive a payment, such as rent, salary, interest, etc. This is known as tax deducted at source (TDS). With the use of this provision, the Indian government guarantees that the tax deduction takes place in advance.
How much of the interest earned on savings accounts is tax-free?
If a person's total interest income is less than Rs 10,000, they are exempt from paying tax under Section 80TTA of the Income Tax Act. If the sum is greater than the tax threshold, one must pay taxes based on their income tax bracket.
Can an NRI obtain a tax deduction under Income Tax Act Section 80TTA?
Indians who are not residents of the United States are eligible for tax advantages under Section 80TTA on savings account interest. Additionally, interest on NRO accounts is subject to a 30% tax deduction at source. NRIs, however, are not permitted to use Section 80TTB of the Income Tax Act to seek tax deductions.
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