Tax on Savings Account - Quick Guide
Savings account tax limit: All you need to know
- With a Savings Account, you can save your hard-earned money and use it in times of need.
- The interest earned on your funds in Savings Account attracts tax and is calculated as per your tax slab
- The rules of section 80TTA are applicable for individuals and Hindu Undivided Family
- Under section 80TTB, applicable for citizens above 60 years of age, a deduction of up to INR 50,000 is allowed.
Purpose of a Savings Account
A Savings Account is the most basic type of account that you can open with a commercial bank. It enables you to keep your money safe with the bank, earn interest on it, and withdraw the funds as and when you need it. A Savings Account is vital because it encourages you to save your money. You also get several useful facilities with your Savings Account. For instance, you can conveniently access your account at any time, withdraw cash at ATM, use international debit cards for purchases and bill payments and transfer funds easily via online banking, easy fund transfers. And while the account gives you many facilities, you should also be aware of the tax implications for savings account. Let us find out more about it.
Tax Implications on Savings Account
Like other financial instruments, the interest earned above a specific limit on the funds in your Savings Account will also attract tax. The interest income is taxable under the subhead 'Income from Other Sources' as per your respective income tax slab rates. However, certain deductions are granted by the government.
The Savings Account tax limit is different for those below the age of 60 and senior citizens (above the age of 60) and applies only to the interest income. However, tax deduction at source (TDS) is not applicable for Savings Account deposits as per Section 194A of the IT Act(1). Here are the details of the tax on savings interest.
What is Section 80TTA?
The government introduced Section 80TTA in the Finance Bill of 2013, making it applicable from the financial year 2012-13 onwards. This section enables a citizen to claim deduction on their interest income and minimise their tax outgo. To be eligible to claim the benefits under this section, you have to be a residing citizen of India. Under Section 80TTA, you do not qualify for deductions on interest accrued on fixed deposits, recurring deposits or, any other deposits to qualify for the deductions. Let us look at the terms and conditions applicable to the tax on Savings Accounts.
- A deduction of INR 10,000 is provided on the interest earned on Savings Account with a bank, co-operative bank and, post office as per Section 80TTA of the IT Act.
- This deduction applies to Savings Accounts held by all individuals and Hindu Undivided Family (HUF.)
- A maximum deduction of INR 10,000 is allowed on the interest accumulated from all Savings Accounts.
- The Government of India allows various relaxations for individuals to decrease their tax liability.
What is Section 80TTB?
The government provides certain benefits to Indian pensioners and senior citizens so that they can have more money in hand. Section 80TTB is one such move that allows deductions on the interest on the Savings Account. This section was introduced for the first time in the budget session of 2018. The salient features of this section are.
- It allows a deduction of up to INR 50,000 on the income interest earned in a financial year.
- Only the interest earned on the fixed deposits, other deposit accounts, and Savings Accounts with banks, post offices and, co-operative societies qualify for this deduction.
- The assessee must be a resident of India and above the age of 60.
- This deduction is over and above the deduction of INR 1.5 lakhs permitted under Section 80C of the Income Tax Act.
Calculation of interest on the Savings Account
Whenever interest on the Savings Account or other deposits goes up, the uptrend in the interest is applicable on the lending with immediate effects. As per the new Reserve Bank of India (RBI) mandate, the interest on the Savings Account is calculated on a daily basis, and is based on your closing amount. The accumulated interest is credited to the account on a quarterly or half-yearly basis depending upon the bank and account type.
Generally, the formula followed to calculate interest on Savings Account is as below:
Monthly interest = Daily balance *(number of days in the month)* interest rate/ (days in the year)
Advantages of a Savings account
Having examined the Savings Account tax limit and interest calculation, let us investigate its advantages. A Savings Account can offer you several benefits, which include the following:
- There is no account opening fee, and you can earn a nominal interest rate on your deposits.
- You get easy access to the money deposited in your Savings Account. You can withdraw your money by simply visiting your bank branch during working hours or by using a debit card for ATM withdrawals.
- A Savings Account comes with internet and mobile banking facilities that help you transfer funds from one account to another.
- You get an international debit card with your Savings Account, which you can swipe anywhere in the world.
- You get rewards and cashback for using the debit card linked to your Savings Account.
- You can apply for cheque books, debit and credit cards directly through the internet banking portal or the mobile app.
The exceptional facilities that come with a Savings Account make it a go-to option to park funds. The interest earned on a Savings Account attracts tax, but under sections 80TTA and 80TTB of the IT Act, deductions are also applicable. Before you open a Savings Account, it is advisable to go through the tax implications.
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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice