Bank pays interest periodically for the money kept in your savings account. Interest on saving account is automatically credited based on the balance maintained in your A/c.
However, due to busy schedules, many taxpayers never look into their savings account statements to find the amount of interest credited.
Interest on the savings account is calculated daily on the closing balance at the end of the day. However, it’s credited to your account monthly, quarterly or half-yearly.
Any amount which is credited to the savings account as interest is liable to income tax. Taxpayers need to disclose it under the head “Income From Other Sources”.
While filing income tax returns, many salaried individuals do not pay attention to saving account interest income. They concentrate on form 16 issued by the employer.
Form 16 will not have your interest income from the savings account.
If you fail to browse your bank statements to collect interest income for the financial year and later on the I-T department found it, then you may end up getting a notice from the income tax department asking you to pay more tax with interest and penalty.
Same concept is applicable to interest on fixed deposits.
Tax deduction by banks on interest income
The bank will not deduct tax at source (TDS) from interest on saving bank accounts.
However, they will be deducting tax (TDS) from interest on deposits. Interest and tax deducted from interest on deposits will be reported to the income tax department every quarter in case your interest on deposit amount is tax deductible. In that case, both interest and tax deducted will be shown in Form 26AS and in the Annual information statement (AIS).
If your interest is not tax deductible, the bank will simply pay you the amount without deducting tax from it.
However, it’s your income which should be reported under the head “Income from other sources” in your IT return and tax should be paid accordingly.
You need to take both interest from a savings account and interest from deposits to your tax return and pay taxes accordingly.
Don’t forget to claim tax deduction U/s 80TTA
Under section 80TTA, an individual who is aged 60 years or less can claim up to Rs 10,000 as tax deduction from interest income.
This means, beyond Rs 10,000, you need to pay tax on interest income.
For example, if you have earned an interest of Rs 20,000 from your savings account, then you need to pay tax on Rs 10,000 after claiming tax deduction of Rs 10,000 under section 80TTA.
Section 80TTA tax deduction is allowed on the income earned as interest from the following sources:
- Savings account with a private or PSU bank,
- Saving account with a co-operative society bank, which has license to carry out banking activities, and
- Savings account with a post office.
Senior citizens can not claim tax deductions under section 80TTA. A new section 80TTB has been introduced for senior citizens.
As per section 80TTB, a senior citizen can claim tax deduction up to Rs 50,000 per annum for interest on savings account and fixed deposits. Please note the difference. 80TTB tax deduction is valid for both interest from fixed deposits and savings accounts, whereas 80TTA tax deduction is only meant for the interest from savings accounts.
Effective interest rate on saving account
Typical interest rate on a savings account is 4%. If you are in the 30% tax bracket, then the effective interest rate after 30% tax adjustment becomes 2.8% per annum.
If you are in the 20% tax bracket, then the effective interest rate is 3.2%.
Same concept is applicable to interest on bank deposits such as term plans and fixed deposits.
Due to this reason, it’s not advisable to have a large sum of money idle in your savings account. If you have a huge amount in your savings account, then consider investing to get a good return.
How to report interest income in tax return
Savings account Interest is taxable under the head “income from other sources”. You need to include the total amount of interest credited to your savings account for the financial year in income from other sources in addition to other incomes if any.
You need to include interest received from all of your saving account.
You have the option to select the source of other income from the drop down available in income tax forms. Select the one that is suitable based on the type of income you have incurred during the period.
After including interest income in your tax return, avail tax deduction up to Rs 10,000 under section 80TTA. In case of senior citizen, tax deduction under section 80TTB is up to Rs 50,000.
Calculate and double check your tax liability before filing the tax return.
