If you have a savings account, you might be wondering whether the interest you earn from it is taxable. The short answer is: yes, it is. However, there are ways to reduce the amount of tax you need to pay.
In this article, we will break down the basics of how interest on savings accounts is taxed, how to calculate it, and how you can claim deductions to lower your tax liability.
How Is Interest on a Savings Account Calculated?
Interest on savings accounts is usually calculated on a daily basis, but it is added to your account monthly, quarterly, or every six months, depending on the bank’s policy.
The Reserve Bank of India (RBI) requires banks to calculate interest on the daily closing balance of your account. Even though it’s calculated daily, the interest you earn is typically credited to your account once a month or at other intervals.
Here’s a simple formula to calculate the interest you earn on your savings account:
Interest per month = Daily closing balance × Rate of interest × (Number of days in a month / Days in a year)
For example, let’s say you have a balance of ₹5 lakh in your savings account and the bank offers an annual interest rate of 6%. Here’s how to calculate the monthly interest:
Interest per month = ₹5,00,000 × 0.06 × (30 / 365) = ₹2,465
Tax on Interest from Savings Accounts
The interest you earn on your savings account is considered income and must be reported in your Income Tax Return (ITR) under the section titled “Income from Other Sources”.
The good news is that banks do not deduct Tax Deducted at Source (TDS) on interest earned from savings accounts. This means that it is up to you to report and pay tax on the interest you earn, based on your income tax slab.
However, there are tax deductions available that can reduce the amount of tax you owe, especially under Section 80TTA and Section 80TTB.
Let’s take a closer look at these deductions.
Section 80TTA: A Deduction for Savings Account Interest
Section 80TTA allows you to claim a tax deduction of up to ₹10,000 on the interest earned from savings accounts.
This deduction applies to:
- Savings accounts with banks
- Savings accounts with cooperative banks involved in banking activities
- Savings accounts at post offices
If your total interest income from these sources exceeds ₹10,000 in a financial year, you’ll only be taxed on the amount above ₹10,000.
For example, if you earn ₹20,000 in interest, you’ll only pay tax on the ₹10,000 that exceeds the limit.
Section 80TTB: A Special Deduction for Senior Citizens
If you are a senior citizen (aged 60 years or older), you are eligible for a more generous deduction under Section 80TTB. This section allows you to claim a tax deduction of up to ₹50,000 on the interest earned from:
- Savings accounts
- Fixed deposits
- Recurring deposits
This higher deduction helps senior citizens reduce their tax burden, especially in retirement when interest income can be a significant source of income.
Key Differences Between Section 80TTA and Section 80TTB
| Section | Eligibility | Maximum Deduction | Applicable to Interest Earned From |
| 80TTA | Individuals, HUFs | Up to ₹10,000 | Savings accounts with banks, post offices, and co-operative banks |
| 80TTB | Senior citizens (60+) | Up to ₹50,000 | Savings accounts, fixed deposits, and recurring deposits |
Important Points About Taxation on Savings Account Interest
- No TDS on savings accounts: Banks do not deduct any tax at source (TDS) on interest earned from savings accounts. However, if you earn interest on fixed deposits (FDs), TDS may be deducted.
- Income tax slab rates: The interest you earn from your savings account is added to your total income and taxed based on your income tax slab. The tax slab rates depend on your total annual income.
- Taxable income: If your interest income exceeds ₹10,000 (under Section 80TTA) or ₹50,000 (under Section 80TTB for senior citizens), the excess amount will be taxed according to your income tax bracket.
How to Report Savings Bank Interest in Your Income Tax Return (ITR)
When it’s time to file your Income Tax Return (ITR), it’s essential to report your savings account interest properly. Here’s how to do it:
- Understand taxability: Interest on savings accounts is taxable under the section “Income from Other Sources.” Senior citizens can claim a deduction of up to ₹50,000 under Section 80TTB, while others can claim ₹10,000 under Section 80TTA.
- Gather documents: Collect your bank statements or passbooks to find the total interest you earned during the financial year.
- Choose the right ITR form: If you are an individual, use ITR-1 or ITR-2 depending on your income situation.
- Enter your interest income: In the “Income from Other Sources” section of the ITR form, input the total interest income. If it’s below the exemption limit, make sure to mention the applicable deduction.
- Complete and file the ITR: Fill out the rest of the form, include any other income or deductions, and submit your return. Be sure to double-check everything before submitting.
These changes can help reduce your overall tax burden and make filing your ITR a little easier.
In summary, while interest earned from savings accounts is taxable, you can lower your tax liability using deductions under Section 80TTA and Section 80TTB.
Keeping track of your interest income, understanding the available deductions, and filing your Income Tax Return (ITR) correctly are essential steps to ensure that you stay tax-compliant and make the most of available tax breaks.
By following these tips and understanding how the tax system works, you can make better financial decisions and reduce the taxes on the interest you earn from your savings account.
FAQs on Taxation of Savings Account Interest
Is interest earned on a savings account taxable?
Yes, interest earned on savings accounts is taxable. However, under Section 80TTA, you can claim a deduction of up to ₹10,000 on the interest earned.
Does TDS get deducted on savings bank interest?
No, banks do not deduct TDS on interest from savings accounts. However, TDS is deducted on interest from fixed deposits.
Can I claim deductions under Section 80TTA for fixed deposits and recurring deposits?
No, Section 80TTA applies only to interest earned from savings accounts, not from fixed deposits or recurring deposits.
What is the maximum deduction allowed under Section 80TTA?
The maximum deduction allowed under Section 80TTA is ₹10,000 for individuals and Hindu Undivided Families (HUFs).
How can I avoid tax on savings account interest?
By utilizing the deduction under Section 80TTA, you can reduce your taxable interest income by up to ₹10,000. For senior citizens, Section 80TTB allows a higher deduction of ₹50,000.
What is the Key Update on Budget 2024?
Finance Minister Nirmala Sitharaman announced two important changes for those using the new tax system.
First, the standard deduction for salaried workers will increase from ₹50,000 to ₹75,000. For pensioners, the deduction on family pensions will rise from ₹15,000 to ₹25,000.
Second, the tax rates in the new system will change as follows:
- Income up to ₹3 lakh: No tax
- Income from ₹3 lakh to ₹7 lakh: 5% tax
- Income from ₹7 lakh to ₹10 lakh: 10% tax
- Income from ₹10 lakh to ₹12 lakh: 15% tax
- Income from ₹12 lakh to ₹15 lakh: 20% tax
- Income above ₹15 lakh: 30% tax
With these updates, a salaried employee could save up to ₹17,500 in income tax.
