How is Interest on Savings Account Taxed?

Interest on Savings

Interest on savings is the additional money you earn when you keep your money in a savings account at a bank. The bank uses your money to lend loans to other people, and in return, they give you a small percentage of the money they earn.  

While certain savings accounts have no minimum balance requirements, others do in order to prevent monthly fees. Your statement could show interest as an annual, biannual, or quarterly credit, depending on your bank.

How is Interest on Savings Account Taxed?

The interest that you earn from your savings account is added to the income from other sources, and later, your entire income is taxed based on the tax bracket. The tax bracket will vary based on each financial year, depending on how much money you have in your bank account.

80TTA and 80TTB are sections of the Income Tax Act in India that allow deductions for interest income earned on your savings. They help reduce your taxable income, which means you pay less tax. 

Section 80TTA:

• 80TTA deductions can be claimed by HUF Hindu undivided families, except for senior citizens aged 60 and above.
• The deductions can be claimed only up to Rs. 10,000 per year.
• It applies only to interest earned on savings accounts and does not include fixed deposits or recurring deposits.
• The Income Tax Act allows you to claim interest income on savings accounts held with banks, cooperative banks, or post offices. 

Section 80TTB:

• 80TTB deductions are claimed only by senior citizens of India, while non-resident Indians (NRIs) are not eligible.
• This section allows for the deduction of up to ₹50,000 per annum to senior citizens.
• It applies to all types of deposits, including a savings bank account, a fixed deposit account, a recurring deposit account, etc.

How is the Interest on Savings Account Calculated?

Interest on savings accounts is computed daily based on the closing balance each day, according to RBI guidelines. Even though it is calculated on a daily basis, it occurs on your account on a monthly, quarterly, or half-yearly basis.

Monthly Interest = Daily Balance x Daily Interest Rate x Number of Days in Month

Where,

The daily balance is the closing balance in your account every day. 

The daily interest rate is the annual interest rate offered by your bank divided by the number of days in a year.

The number of days in a month can vary, depending on the month.

What is the TDS on Interest on Savings Account?

TDS refers to the tax deducted at source on interest earned from savings accounts in India. 

• A savings account is exempted from TDS under Section 19A of the Income Tax Act of 1961.
• The interest income is subject to taxes, and it will be based on your tax slab. 
• All interest income, including that from savings accounts, must be reported under the "income from other sources" heading. 
• TDS is deducted at 30% for NRIs on interest received on NRO accounts. Interest received on NRE accounts is not subject to TDS deductions.