Tax on Savings Bank Interest: Deductions Under Section 80TTA

How is interest earned on a savings account calculated?

As per the guidelines prescribed by the RBI, the interest on a savings account is calculated on a daily basis on the closing balance each day. Though the calculation is done on a recurring basis, but the interest is credited to the account on a monthly, quarterly, or half-yearly basis, whatever the case may be.

Any amount that is credited as interest on the savings bank is income for the taxpayer and needs to be disclosed under his/her Income tax return under the head Income from other sources while filing ITR.

The below formula is used to calculate interest on a general savings account:

Interest per month = Daily closing balance * Rate of interest * Number of days / (Days in a year)
For instance, if the daily balance is Rs. 5 lakh and the interest offered a on savings account is @6% per annum, the interest component shall be calculated as follows:
Interest per month = Rs. 5 lakh * .06 * 30 / 365 = Rs. 2465

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Tax on Savings Account Interest

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 interest.

The interest on the savings account is taxable as per the income tax slab rates that apply to the investor. In this regard, it also has to be kept in mind that a deduction under section 80TTA and Section 80TTB can also be allowed on the interest earned from the savings account

Under Section 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 cooperative 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.

In contrast, Section 80 TTB is specifically tailored for senior citizens. It allows them a more substantial deduction of up to Rs. 50,000 per year on interest income earned from Savings Accounts and fixed and recurring deposits. This provision aims to ease their tax burden on interest income, thereby ensuring their financial well-being during retirement.

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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 financial 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 applies at 30% on interest earned on the Non-Resident Ordinary (NRO) accounts,. while there is no tax applicable on Non-resident External (NRE) accounts.

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What is Section 80TTB?

This section is responsible for granting a deduction of up to Rs 50,000 p.a. on interest on fixed deposits and savings accounts to senior citizens who are above 60 years old. The same deduction is valid for interest on fixed deposits. There is a difference between the deductions given to senior citizens and the deductions given to others. The first deduction is valid for both interests from savings accounts and fixed deposits, whereas the latter is only meant for savings accounts.

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Key Points on Taxation of Savings Account Interest

1. Eligibility for Deduction: Only individuals and Hindu Undivided Families (HUFs) can benefit from the deduction under Section 80TTA. Businesses and firms are not eligible for this deduction.
2. Interest Sources: Interest earned on savings accounts in banks, post offices, and cooperative banks qualifies for the deduction.
3. Maximum Deduction Limit: A maximum deduction of ₹10,000 is allowed on the total interest earned across all eligible savings accounts.
4. Tax Implications on Excess Interest: Any interest income exceeding ₹10,000 in a financial year is subject to taxation as per the individual's applicable income tax slab.
5. Documentation: It’s essential to maintain proper records and bank statements to substantiate the interest earned when claiming the deduction.
6. Impact on Total Income: The interest earned from savings accounts contributes to the total taxable income, and individuals should be aware of this when calculating their tax liabilities.

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How to Report Savings Bank Interest in Your ITR

Reporting savings bank interest in your Income Tax Return is essential for tax compliance. First, understand that savings bank interest is taxable under “Income from Other Sources,” with an exemption limit of ₹10,000 under Section 80TTA for individuals and Hindu Undivided Families (HUF), and ₹50,000 for senior citizens under Section 80TTB. Gather your bank statements to determine the total interest earned during the financial year. When filling out your ITR, select the appropriate form (ITR-1 or ITR-2 for individuals), and in the “Income from Other Sources” section, enter the total interest income.

If the interest is below the exemption limit, be sure to mention this exemption. After entering the interest income, complete other sections of the ITR form, including additional income details, deductions, and tax payments. Finally, review your form for accuracy before submitting it online.

You can also report your saving bank interest in your ITR with the help of tax2win tax experts who ensure the correct information is mentioned in the ITR to avoid any future consequences. Additionally, the tax experts help your reduce your taxable income by suggesting the right tax exemptions. File your Income Tax Return today

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