What you should know about tax deduction on Savings Account interest

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

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.

According to experts, investors should include the interest they earn in their tax returns. Under the Income Tax Act of 1961, taxpayers can decrease their tax liability by taking advantage of many tax incentives. To do so, though, you must understand how tax is applied on interest on a savings account.

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. It makes an account with a balance of less than ₹10,000 a tax-free savings account. The additional interest on the savings account will be taxable if the interest earned from these sources exceeds ₹10,000.

An account holder must calculate and submit interest income from the different savings bank accounts during the financial year.

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. Businesses and firms cannot use the feature.
• 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.

As for senior citizens, they can save tax of up to ₹50,000 per year. While 80 TTA allows tax deduction only on savings accounts, 80 TTB allows senior citizens to save tax on all kinds of deposits. It is a distinguishing feature and a special benefit only afforded to senior citizens.

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.

Disclaimer

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