How is the Savings Account Interest Calculated?

Tax Implications
As per the guidelines prescribed by RBI, the interest on a savings account is calculated daily, on the closing balance. Previously up to 2009-10, interest was calculated on the minimum balances held in the accounts from the 10th day to the last day of each calendar month. 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.

Any amount which is credited as interest on the saving bank is an income for the taxpayer and needs to be disclosed under his/her Income tax return under the head Income from other sources.

Savings Bank Account Interest Income and Taxes

The interest that gets accumulated in the savings bank 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.

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.

TDS on Savings Account Interest?

According to Section 194A of Income Tax Act, 1961, TDS is not applicable on the interest accrued from the savings account.
TDS is there for the NRIs at the rate of 30% on NRO accounts.
Further, there is no TDS on the interest accrued in the NRE accounts.

Benefits of Savings Account?

In India after the Jan Dhan Saving Bank Account introduction in the economy, almost every household in the country is having one more saving bank account. Major benefits of saving bank account can be summarised as below:-

• Safe & secure:- As banks are regulated by RBI, it is safe to keep any deposit with banks.
• Easy access:- With the growing networks of banks & ATM’s and centralised banking system, a debit card holder of any bank can easily withdraw his money at the time from the ATM of any bank.
• Interest :- any amount held in cash will not earn money i.e, idle cash will not generate any penny while deposit in saving banks will lead to generation on the interest which is tax deductible upto an amount of Rs. 10,000/-.
• Credit worthiness:- Transactions in savings bank account can be used to determine the cash management of any person as the number of transactions, frequency of similar transactions can tell the usage of money by the person.
• Other benefits:- Many banks offers personal insurance services embeded in their saving bank product. Also, nationwide Pradan mantri jeevan jyoti yojna is also available with all banks serving the same purpose in a small amount.

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.

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.