Tax on Savings Account Interest: The Fine Print You Can’t Ignore!

Savings Accounts are the cornerstone of personal finance, offering a secure place to store funds while earning interest. However, many account holders remain unaware of the tax implications associated with the interest earned on these accounts. Understanding how this interest is taxed is crucial for effective financial planning and compliance with tax regulations.

How is Interest Earned on a Savings Account Calculated?

The Reserve Bank of India (RBI) mandates that interest on Savings Accounts be calculated daily based on the closing balance. While this interest accrues daily, banks typically credit it to accounts on a monthly, quarterly or half-yearly basis. The formula for calculating monthly interest is:

Interest per month = (Daily Closing Balance × Annual Interest Rate × Number of Days) / Days in a Year

Taxation of Savings Account Interest

Interest earned from a savings account is categorized under "Income from Other Sources" and is taxable as per the individual's applicable income tax slab. Notably, banks do not deduct Tax Deducted at Source (TDS) on savings account interest. However, taxpayers can avail deductions under Sections 80TTA and 80TTB of the Income Tax Act.

Section 80TTA: Deduction for Interest on Savings Accounts

Section 80TTA provides a deduction of up to ₹10,000 per financial year on interest earned from savings accounts held with banks, post offices, or cooperative societies. This deduction is available to individual taxpayers and Hindu Undivided Families (HUFs) but excludes senior citizens, who are covered under Section 80TTB. If the total interest earned exceeds ₹10,000, the excess amount becomes taxable. 

Section 80TTB: Enhanced Deduction for Senior Citizens

Introduced to provide greater tax relief to senior citizens, Section 80TTB allows a deduction of up to ₹50,000 per financial year on interest income. This includes interest from savings accounts, fixed deposits, and recurring deposits. To be eligible, one must be a resident senior citizen aged 60 years or above. 

Key Differences Between Sections 80TTA and 80TTB

• Eligibility: Section 80TTA is applicable to individuals (below 60 years) and HUFs, whereas Section 80TTB exclusively benefits resident senior citizens.
• Deduction Limit: Section 80TTA offers a maximum deduction of ₹10,000, while Section 80TTB provides a higher limit of ₹50,000.
• Interest Sources: Section 80TTA applies only to interest from savings accounts, whereas Section 80TTB encompasses interest from savings accounts, fixed deposits, and recurring deposits. 

Reporting Savings Account Interest in Income Tax Returns

Taxpayers must report interest earned from savings accounts under the "Income from Other Sources" section when filing their Income Tax Returns (ITR). Even if the interest amount is within the deductible limit under Sections 80TTA or 80TTB, it should still be declared, and the corresponding deduction claimed. Maintaining accurate records and bank statements is essential to substantiate the interest income reported.

Consider an individual below 60 years who has earned ₹15,000 as interest from savings accounts in a financial year. Under Section 80TTA, they can claim a deduction of ₹10,000, and the remaining ₹5,000 will be added to their taxable income.