Budget 2024 Update
FM Nirmala Sitharaman has made two announcements for those opting for the new tax regime.
First, the standard deduction for salaried employees is proposed to be increased from Rs 50,000/- to Rs 75,000/-. Similarly, deduction on family pension for pensioners is proposed to be enhanced from Rs 15,000/- to Rs 25,000/-.
Second, in the new tax regime, the tax rate structure is proposed to be revised, as follows:
- 0-3 lakh rupees - NIL tax
- 3-7 lakh rupees - 5% tax
- 7-10 lakh rupees - 10% tax
- 10-12 lakh rupees - 15% tax
- 12-15 lakh rupees - 20% tax
- Above 15 lakh rupees - 30% tax
As a result of these changes, a salaried employee in the new tax regime stands to save up to Rs 17,500/- in income tax.
How is interest earned on a savings account?
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 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
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 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.
TDS on Savings Account Interest?
According to Section 194A of the 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 Savings Bank Account introduction in the economy, almost every household in the country has one more savings bank account. The major benefits of saving bank account can be summarised 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 deposits in savings banks will lead to generation 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 offer personal insurance services embedded in their savings bank product. Also, nationwide Pradhan mantri jeevan jyoti yojana 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 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.
Note:- Section 80TTA is meant to incentivize saving in regular savings accounts. Any interest income generated from investments with fixed terms or other interest-bearing instruments outside of savings accounts falls outside the scope of this deduction.
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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How is the Savings Account Interest Calculated?
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 the 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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