"Savings accounts are often a great way to save for the future, but is interest on savings account taxable? This blog post answers this question in detail and tells you everything you need to know about taxes on interest earned on a savings account so you can make the most of your financial decisions.
The fact is that interest earned on savings accounts beyond a specific amount is taxed similarly to income. The same applies to interest on savings and investments, post office savings plans, fixed deposits (FDs), and recurrent deposits (FDs). Let's dig deeper.
How is Interest Earned on a Savings Account?
The following formula is used to compute interest on a savings account:
Daily closing amount * Interest rate * Number of days in a month/Number of days in a year = Monthly interest
The RBI's regulations provide that interest on savings accounts is calculated each day based on the closing balance. It is credited to your account once a month, once every three months, or once every six months.
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Your total income is taxed in accordance with the appropriate tax bracket after your interest income from your savings account is added to all of your other sources of income. This will change depending on how much money was in your bank account during that time each financial year.
Gather all your savings account statements from the previous fiscal year to get an idea of the tax on your earned interest. Find the interest accrued to your savings account in the deposit column. Your statement may reflect interest as an annual, biennial, or quarterly credit, depending on your bank (s).
What is Section 80TTA?
You are able to deduct savings account deposits deposited at a post office, bank, or cooperative organisation under Section 80TTA of the Income Tax Act.
Here are some aspects of Section 80TTA:-
Interest earned up to ₹10000 in any fiscal year is not tax deductible for any national who is 60 years of age or under. The following sources of interest income are eligible for this deduction:
- A bank account for savings
- An account with a cooperative society that conducts banking operations
- An account with the post office for savings
Senior citizens, however, are not eligible for section 80TTA's benefits. The senior citizen tax exemption threshold under Section 80TTB is ₹50000. Therefore, the savings account interest is not subject to TDS deduction.
Tax is deducted at source, or TDS, for NRIs and is applied at a rate of 30% on interest on non-resident ordinary or NRO accounts. There is no tax owed on NRE or non-resident external accounts.
What is Section 80TTB?
Section 80TTB of income tax is in charge of allowing senior persons, or those over 60, to deduct up to ₹50000 per year from interest on fixed deposits and savings accounts. The interest on fixed deposits is also eligible for the same deduction. The deductions provided to senior citizens and those given to everyone else differ.
While the latter is only intended for fixed deposits, the first deduction applies to savings accounts and fixed deposit interest.
How to Correctly Calculate Taxable Interest on Savings Account?
The interest earned you spot prima facia in your account may be for the prior year in cases of biannual interest pay-out, which is the most typical way interest is paid out. In such circumstances, ask the bank staff for assistance in determining how to compute the interest generated for the pertinent fiscal year.
Make a list of every interest credit in your bank accounts and then add it. If the net interest generated exceeds ₹10000, a ₹10000 deduction will be made from the overall amount. When calculating taxes, any amount over ₹10000 should be listed in the income section. You should also think about tax planning if you want to reduce your tax liability.
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FAQs
1. How to avoid tax on savings account interest?
Every savings bank account’s interest earnings up to ₹10000 are exempt from taxation under Section 80TTA. However, if a person makes more than that, the additional income will be taxed.
2. Can I deduct interest earned from all of my savings accounts if I have more than one?
Yes, you can deduct interest earned from all of your savings accounts if you have more than one – but there’s a catch. The total limit is ₹10000. So if the interest you’ve earned across all your accounts adds up to more than ₹10000, you won’t be able to deduct it all.
3. How much can I retain in my bank account before paying taxes?
Under income tax laws or banking regulations, there are no restrictions on the maximum amount that can be kept in a savings account. However, different banks have different rules requiring account holders to maintain a minimum balance in their savings accounts, failing which they levy penalties for such non-maintenance.
Although you are not required to pay any tax to the bank, the interest earned on savings accounts is subject to taxation, just like other types of income.
4. Must my tax return include bank interest?
In the main section of your tax return, you must disclose any bank interest you received on any of your bank accounts. It must be included in the income portion of your tax return, with the interest you earned broken down into amounts that have and have not been taxed.
You can look for information on your bank statements for the tax year or check your interest certificates to see if tax has been deducted.
5. How much interest on a savings account is tax-free for senior citizens?
Under Section 194A of the Income Tax Act, no Tax Deducted at Source (TDS) is deducted from interest payments made by a bank, post office, or cooperative bank to a senior citizen totalling up to ₹50,000. This cap must be calculated for each bank separately.
