Savings accounts are a great way to keep your funds safe and use them for daily financial needs. Banks also give interest on funds parked in savings accounts. However, these interests are taxable.
Are you searching for ‘is interest on savings account taxable’, then this is the right article for you. Here, we will discuss tax on savings account interest and how much tax is charged on savings accounts.
Before you learn about how income tax on savings account interest is calculated, you should learn how interest is calculated on your savings bank account funds.
According to the rules of the Reserve Bank of India, banks calculate interest on funds in savings bank accounts based on the daily closing balance. Even though the interest is calculated daily, it is credited monthly, quarterly, bi-yearly, or yearly.
Here is the formula banks use to calculate the interest on savings bank account funds -
Interest per month = Daily closing balance * Rate of interest * Number of days / (Days in a year)
Let’s try to understand this with an example. Suppose you have Rs.1 Lakh in your bank account at the end of each day for a month of 30 days. Let’s also assume that your bank gives you 7% per annum interest.
Then, according to the formula, your monthly interest
= Rs.1 Lakh * (7/100) * 30 / 365 = Rs.210000 / 365 = Rs.575
So, you will earn a monthly interest of Rs.575.
Yes, you have to pay a tax on savings account interest in India.
Interest earned on normal funds in savings bank accounts, Recurring Deposits, or Fixed Deposits are all taxable. None of these are tax-saving investment options.
However, the way interest is taxed is different for all three. We will focus only on ‘income tax for saving account’ here.
You can have as many savings accounts as you want in India, in multiple banks. When the tax is calculated, the Income Tax Department considers the cumulative interest earned on all your savings accounts. This includes accounts in all banks and post offices.
The income tax is added under ‘Income from Other Sources’ and then the total is taxed under the relevant tax slab you are under. This will vary each year depending on the funds you have in the accounts each year.
Now that you know interest on a savings account is taxable, let us dig deeper to understand how much tax is charged.
The income from interest earned from banks comes under Section 80TTA of the Income Tax Act, i.e. ‘Deduction in respect of interest on deposits in savings account’. There are some exemptions and the remaining is taxed based on your tax slab.
Under this section, amounts up to Rs.10,000 total is exempted from taxes. This applies to individuals and HUFs under the age of 60.
Please note that this will be calculated based on the total interest earned in a financial year in all of your bank accounts. This includes accounts held in banks, post offices, and cooperative societies. This cannot be applied to interest earned on Recurring or Fixed Deposits.
Thus, if you have earned an interest of Rs.15,000 in a financial year, only the remaining Rs.5,000 will be taxable.
Under this section, the exemption is for amounts up to Rs.50,000. This applies to interest earned on all kinds of deposits like a savings bank account, fixed deposit account, recurring deposit account, etc.
Only Indian resident citizens above the age of 60 can claim deductions under this section. Non-resident Indians (NRIs) are not eligible for these deductions.
It is also to be noted that if the interest income from a savings account is owned by an Associate of Persons (AOP), a firm, or a body of individuals (BOI), this deduction will not be applicable for any partner or member.
Banks pay interest on funds parked in your savings bank accounts. According to the guidelines by RBI, interest is calculated on the closing balance available in your account per day. However, the interest is paid monthly, quarterly, bi-yearly, or yearly.
If you earn interest higher than Rs.10,000, you must pay taxes as per your tax slab. For senior citizens, interest earned up to Rs.50,000 is tax-free. However, that includes interest earned on RDs and FDs.
As savings bank accounts, RDs, or FDs are not tax-saving investment options, it is advisable to not park high amounts in these.
In a financial year, interest earned up to Rs.10,000 is tax-free. This is a cumulative earning on all your savings accounts, including banks, post offices, etc.
Yes, you can deposit Rs.5 Lakh in your account in a financial year without having to pay taxes. If the amount in your bank account exceeds Rs.10 Lakh in a fiscal year, you will have to inform the IT department and pay due taxes.
Interest earned up to Rs.50,000 in a financial year is not taxable for senior citizens in India. This includes taxes earned on savings bank accounts, fixed, and recurring deposits.
There is no limit as to how many bank accounts a person can have. It is, however, advisable to not have too many accounts as it can become difficult to maintain them.
To claim tax deductions under Section 80TTA, you will need to submit bank statements that show the interest earned. You can submit interest certificates if your bank provides them.
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