Opening a Savings Account is the best way to keep your money safe. Other than safeguarding your funds, the account gives you interest on your savings too. For instance, AU Small Finance Bank's high-interest rate Savings Account lets you earn Monthly Interest Payouts, and you can utilize the interest income to meet various short-term financial obligations.
But did you know the interest income on a Savings Account is taxable? For instance, if you have multiple Savings Account and the cumulative sum of all interest value is beyond the prescribed limit of INR 50,000, you are required to report it as 'Income from other sources' in the Income Tax Return Filing (ITR). Let's get to know about tax on Savings Account interest.
What is Savings Account and Its Purpose
A Savings Account is a deposit account where you can save your idle funds. Basically, the account type helps to serve the following purpose:
- The main objective of opening a Savings Account is to keep your money safe.
- It helps to build a disciplined habit of saving regularly.
- If you are facing a shortage of funds for medical, school fees, wedding, or car purchase, you can easily withdraw funds from the account and pay for an emergency.
- Some of the common features include easy withdrawal of cash through debit card, fund transfer, ability to make investments, and online payments through UPI, among others.
- Just like Fixed Deposits or Recurring Deposits, a Savings Account also helps to earn interest.
- If you have more than one Savings Account and the interest earnings are beyond a specific limit, you are liable to pay income tax on Savings Account interest.
Tax Implications on Savings Account
The interest earned on a Savings Account is taxable if it exceeds the prescribed limit of INR 50,000. As per tax laws, such interest earnings come under the "Income from other sources" category, and the Savings Account holder must report this when filing an Income Tax Return (ITR). Pertaining to this, here's what you need to know about the tax deductions applicable under Sections 80TTA & 80TTB.
What are Sections 80TTA & 80TTB?
- As per Section 80TTA of the Income Tax Act, 1961, you are allowed to claim deduction on the interest earned from a Savings Account with a bank, post office, or cooperative bank.
- The maximum that can be claimed for all Savings Accounts is INR 50,000.
- All individuals & HUF members are entitled to a deduction.
- NRIs are also eligible for a tax deduction.
- Section 80TTB of the Income Tax Act, 1961, deals with a tax deduction that is granted to senior citizens (above 60 years of age) for interest income earned on Savings or Fixed Deposit Accounts held with a bank or post office.
- The tax deduction is applicable only for an amount of INR 50,000 or below.
- The deduction can be made for multiple Savings Accounts or FDs as long as the total deduction is INR 50,000 or below.
How to Calculate Savings Account Interest Rate?
As per the RBI regulation, the Savings Account interest rate is calculated depending on the closing balance every day. Below is the formula if you want to do a Savings Account interest rate calculation:
Interest on a monthly basis = Daily Balance * (Number of days) * Interest / (Days in the year)
For instance, if the daily amount is INR 2 Lakhs and you earn interest at the rate of 7%* per year, the computation will be as follows:
2 Lakhs * 30 * (7/100) / 365 = INR 1150.68 per month in interest.
Calculating the Taxable Interest on your Savings Account:
You can easily calculate your deduction under Section 80TTA & 80TTB when filing your IT returns. First, determine your interest earned on your Savings Accounts for a particular financial year. You must put these details in the 'Income from other sources' heading. Under deductions, you can choose Section 80TTA/80TTB as per your eligibility, and your taxable income calculated will be directly reduced as per your eligibility.