Savings Account Interest - Benefits & Taxes

Interest Income from Savings Bank Account and taxes levied on them

The interest that gets accumulated in the savings bank or SB account should always be declared in the tax return under the heading of income from other sources. The banks do not deduct TDS on savings bank interests. Interest from both recurring deposits and fixed deposits is taxable whereas interest from the savings bank accounts and deposits in the post office are only tax-deductible to a certain extent. They should be shown under income from other sources.

The interest on the savings account is taxable as per the income tax slab rates which apply to the investor. In this regard, it also has to be kept in mind that deduction under section 80TTA can also be allowed on the interests earned from the savings account with a maximum of Rs 10, 000 per year. This deduction is only meant for individuals and HUF.

Under 80TTA of the Income Tax Act, interest up to Rs 10, 000 earned from all savings bank accounts is not taxable. This is valid for co-operative banks, post offices or savings bank accounts. If the interest earned from all these sources is more than Rs 10, 000, then the extra amount comes under tax deduction.

This means that if somebody earns an interest of Rs 20, 000, he will have to pay income tax on Rs 10, 000. It is always suggested to keep a minimum balance in the savings accounts as the rates of interest are very low and can also be reduced by income tax payable. The rate is around 2.8% p.a. for a person in a 30% tax slab with a 4% interest on the savings account.

What is Section 80TTA?

For any resident of the country who is aged 60 years or less. Interest earned up to Rs 10, 000 in any fiscal year is not tax-deductible. This deduction is allowed on the income earned as interest from the following sources:

• Savings account with a bank
• Saving account with a co-operative society which is carrying out banking activities, and,
• Savings account with a post office

It should be kept in mind that senior citizens cannot avail the benefits of section 80TTA. The tax-exempt limit is Rs 50, 000 for the senior citizens u/s 80TTB. There is no provision of TDS deduction on the savings account interest. For the NRIs, tax is deducted at source i.e. TDS is implemented at 30% on interest on the Non-Resident Ordinary or NRO accounts. For the NRE or Non-resident External accounts, there is no tax applicable.

What is Section 80TTB?

This section is responsible for granting a deduction up to Rs 50, 000 p.a. to interest on fixed deposits and on savings accounts to the senior citizens that are people above 60 years. The same deduction is valid for the interests on fixed deposits. There is a difference in the deductions given to the senior citizens and the deduction given to the others. The first deduction is valid for both interests from savings accounts and fixed deposits whereas the latter is only meant for the savings accounts.

How the calculation of interest on a savings account is done?

As per the guidelines prescribed by RBI, the interest on a savings account is calculated daily, on the closing balance. Though the calculation is done regularly, the interest is credited to the account on a monthly or quarterly or half-yearly basis, whatever is the case.

The formula used to calculate the interest is:
Interest per month=Daily Balance * Rate of interest * Number of days/days in a year
Let us take an example:
If the daily balance is 50, 000 and the interest offered is 5% p.a., the interest will be 50, 000*.05* 30/365= Rs 205

As already discussed, the interest earned on a savings account is calculated under the head of Income from Other Sources. This interest income should be declared in the income tax return and will be taxable according to the particular slab. According to Section 19A of Income Tax Act, 1961, TDS is not valid for the interest accrued from the savings account.

TDS is there for the NRIs at the rate of 30% on NRO accounts and again there is no TDS on the interest accrued in the NRE accounts. The interest earned on savings account up to Rs 10, 000 is treated as a deduction i.e. if interest savings is Rs 22, 000 a deduction of Rs 10, 000 will be made from the gross income.

Latest news

In the interim budget of the year 2019, finance minister Piyush Goyal planned to raise the TDS limits for the interest earned on the post office and bank deposits to Rs 40, 000 from the existing Rs 10, 000. This means that for the taxpayers, no TDS will be deducted from the interest income up to a limit of Rs 40, 000. This does not mean that the income generated from these interests will not be taxable. As per the current laws of income tax, they will still come under the purview of income tax.

In earlier situations, the taxpayer had to submit Form 15G to avoid TDS if the income from the interest crossed the limit of Rs 10, 000. If this was not done, then the TDS would be deducted in case the interest crossed Rs 10, 000. In these cases, if the income was below the taxable limit, one can claim a refund of the TDS.

This is a very good practice for decreasing the tax burden on the small depositors as well as the non-working partners. Form 15G can be submitted by anyone whose total income for any fiscal year is below the limits of tax exemption.

As the limit has been increased to Rs 40, 000 now, TDS will not be deducted till the interest income from the FDs and the post office deposit schemes cross the mentioned limit. Raising the limit has proved to be helpful for those who had to claim a refund of the TDS when the limit was Rs 10,000. Note, as per this section, those who are below 60 years of age can still claim deductions up to Rs 10,000 on the interest from a savings account, if it’s a nationalised or a co-operative bank, or a post office; in the respective financial year.However, the interest is not exempt from deductions. The taxpayer must show the income earned as “income from other sources” and must file them as a return.

In 2018, a new section called section 80TTB was introduced in the IT Act for senior citizens. As per this section, Rs 50,000 would be the maximum deduction allowed on income generated from interests, and deposits in banks, co-operative societies or postal offices.The scope of this income includes the interest earned from fixed deposits, savings accounts, and the deposits in schemes such as Senior Citizens Savings Scheme(SCSS), Post Office Monthy Income Scheme(POMIS), etc. The limit for TDS on interest income has also been raised from Rs. 10,000 to 50,000.

Conclusion

Savings accounts are designed to encourage people for more savings, unlike the current accounts which allow umpteen transactions in a day. The current accounts do not offer any interest. Any individual with a steady income can benefit a lot from the savings accounts. People who have short term goals like going on a holiday or planning a wedding can also benefit from these accounts. The interest rate charged on a savings account varies from 4-6% and as the number of transactions has been limited by the banks, people tend to save more.