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A savings account is a type of bank account that is designed for individuals to securely deposit and accumulate their savings while earning a modest interest rate. Unlike current accounts, which enable unrestricted transactions and do not pay interest. An individual who has a steady income can benefit from savings accounts.
Individuals often have multiple savings accounts, so the interest achieved on the saved money is much higher. Almost every bank offers the facility of savings accounts like, HDFC Bank, Kotak Mahindra Bank, ICICI Bank, Yes Bank, Axis Bank, IndusInd etc.
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.
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 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
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 can also be allowed on the interest earned from the savings account with a maximum of Rs 10,000 per year. This deduction is only meant for individuals and HUF.
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.
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.
In India, after the Jan Dhan Saving Bank Account introduction in the economy, almost every household in the country has one more saving bank account. The major benefits of saving bank account can be summarised as below:-
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:
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.
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.
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 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.
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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.
Under Section 80TTA, interest earned up to Rs, 10000 from every savings bank account is not taxed. But, if somebody earns more than that, the extra amount will be taxed.
There is no TDS for the interest earned on the savings bank accounts of an individual or a Hindu Undivided Family. It is taxable in the hands of the account holder when it goes above a certain limit.
Section 80TTA is also known as a deduction in respect of interest on deposits in a savings account. As long as the total amount of interest seeking exemption is less than or equal to Rs 10, 000, no tax will have to be paid.
No, Section 80TTA provides deduction on interest on deposits in saving accounts not time deposits with banks, cooperative societies and post office.
No, interest earned on FD is liable for TDS.
Yes, but the collective limit is Rs. 10,000.
The maximum deduction as per section 80TTA is INR 10,000.
