Is interest on savings account taxable?

The interest earned on a savings account is taxable, but there are methods to reduce your tax liability. Read on to know what they are

Are you wondering if the interest earned on your savings account is taxable? It's a common query that a lot of people are unsure about. In India, the interest earned from your savings account is subject to tax, but with certain exemptions and conditions but no tax is required to be deducted on the interest from savings account. The taxable interest must be disclosed in your income tax return under the head 'Income from Other Sources.' Under the Income Tax Act of 1961, taxpayers can decrease their tax liability by taking advantage of many tax incentives. Understanding the mechanism of these tax regulations can help you manage your finances more effectively and avoid any unwelcome surprises during tax season.

Interest earned above a threshold is taxed in the same way as income. Interest on savings and investments, which includes savings accounts, post office programmes, fixed deposits (FDs), and recurrent deposits (FDs), fall into this category. However, many taxpayers are unaware of how the tax is applied to the interest they earn. Read on to get into the specifics of how and when this interest becomes taxable.

How is interest earned on a savings account?

According to the norms issued by the Reserve Bank of India (RBI), interest on savings accounts is determined daily on the closing sum. Although the interest on a savings account is calculated daily, it is credited to your account monthly, quarterly, or half-yearly.

Interest on a savings account is calculated using the formula below:

Monthly interest = Daily closing amount * Rate of interest * Days in month / (Days in a year)

What are the rules on income tax on a savings account interest?
 

Interest generated on a savings bank account is tax-free up to ₹10,000, under section 80TTA of the Income Tax Act. The interest on the savings account will be taxable in the hands of the recipient if the interest earned from these accounts exceeds ₹10,000.

An account holder must calculate and aggregate interest income from the different savings bank accounts during the financial year for the purpose of calculating the threshold of ₹10,000.

For senior citizens, aged 60 and above, Section 80TTB extends the deduction limit to ₹50,000 per annum on the interest earned from savings accounts, fixed deposits, and recurring deposits held with banks, or co-operative societies. This broader scope of eligible interest sources provides significant tax relief, recognising the financial needs and limited income opportunities for senior citizens.

Tax deduction under Section 80TTA
 

Section 80TTA of the Income Tax Act, 1961, provides a tax deduction for individuals and Hindu Undivided Families (HUFs) on interest income earned from savings accounts. This deduction is applicable to interest earned from savings accounts held with banks, post offices, or co-operative societies. The maximum deduction allowed under Section 80TTA is ₹10,000 per annum.

It is important to note that this benefit does not extend to interest earned on fixed deposits, recurring deposits, or any other type of time deposits. To avail this deduction, the interest income must be reported in the taxpayer’s annual income tax return.

Tax benefits for senior citizens
 

Senior citizens in India enjoy several tax benefits designed to ease their financial burden.

• Under Section 80TTB, they can claim a deduction of up to ₹50,000 annually on interest income from savings, fixed deposits, and recurring deposits with banks, post offices, or co-operative societies.
• The basic exemption limit for senior citizens (aged 60-79) is ₹3 lakh, and for super senior citizens (aged 80 and above), it is ₹5 lakh, higher than the general exemption limit of ₹2.5 lakh.

These provisions help reduce their taxable income, offering substantial financial relief in their retirement years.

Important points on tax on a savings account interest
 

Here are some key points to note about saving tax on interest earned on a savings account:

• Individuals and HUFs are the only ones who can take advantage of the deduction u/s 80TTA. Businesses and firms cannot avail this deduction
• Interest earned on any savings accounts held in post offices, banks, or co-operative banks is eligible for a maximum deduction of ₹10,000.
• Any interest earned over ₹10,000 from these sources is taxed.

Saving interest earned on a savings account can help build wealth. The interest gets compounded and increases your wealth corpus. Hence, opening a savings account can be beneficial for your investment portfolio. You can open a savings account with any institution, or via Mobile Banking, but it is better to choose a leading institution such as IDFC FIRST Bank. To understand your needs and guide you through the application process, IDFC FIRST Bank customer support is available on 1800 10 888. The best banks offer a high interest rate on savings accounts, which increases your wealth.