Savings accounts are a secure investment option for most individuals. The more you save,
the more interest you earn – that's the basic premise. Many of us even maintain multiple
savings accounts, boosting our interest earnings. However, there's a twist. If your savings
account interest crosses ₹10,000 in a financial year, you're in the tax bracket. Fear not,
though, as there's a tax exemption in play here.
The ₹10,000 Exemption Clause
Under Section 80TTA of the Income Tax Act, the interest from your savings account is
exempt from tax up to ₹10,000 during a financial year. This exemption is available for both
individuals and Hindu Undivided Families (HUFs). Here's the catch – it's not based on
individual bank accounts but on the total interest you earn across all your accounts.
The Lowdown on Fixed Deposit Taxation
Now, what about fixed deposits? Are they tax-free? Well, not quite. According to the
Income Tax Act of 1961, the interest you earn from fixed deposits is categorized as "income
from other sources" and is fully taxable. This means it gets added to your annual income,
and the taxman takes a share based on the existing tax laws.
When Fixed Deposits Face Taxation
Since April 2019, the tax scenario for fixed deposits has seen some changes. If the interest
you earn from your FDs exceeds ₹40,000 in a financial year, there are tax implications. PAN
cardholders are subject to a 10% tax on the interest, while non-PAN cardholders face a
steeper 20% tax. This tax is collected at source (TDS) when the annual interest is credited.
The ₹40,000 limit applies to individual FDs, not the total sum across all FDs.
Cracking the Savings Account Tax Code
So, how is the interest from savings accounts taxed? It's quite straightforward. The interest
you earn on your savings account is added to your income from all sources, and then you're
taxed according to your applicable tax bracket for that financial year. This tax rate can vary
annually, depending on your account balance during that period. Some savings accounts
might require a minimum balance to avoid monthly fees, while others have no such
requirement.
Section 80TTA – the Savings Account Savior
Section 80TTA, also known as 'Deduction in respect of interest on deposits in savings
account' comes into play here. This deduction applies to individuals and HUFs below 60
years of age, but it's specifically for savings accounts, not term deposits, fixed deposits, or
recurring deposits. Under Section 80TTA, you can claim deductions on savings account
deposits held in post offices, banks, or cooperative societies. However, any interest earned
beyond ₹10,000 from these sources becomes taxable.
Section 80TTB – Senior Citizens' Savings Perk
Senior citizens have their own tax perk under Section 80TTB. This section allows a deduction
of up to ₹50,000 annually on interest earned from savings accounts and fixed deposits. It
covers various types of deposits, including savings bank accounts, fixed deposits, and
recurring deposits. But there's a catch – if the interest income from a savings account is
owned by an Associate of Persons (AOP), a firm, or a body of individuals (BOI), Section
80TTB deductions won't be available to the partner or any member of AOP or BOI.
Non-resident Indians (NRIs) don't get to enjoy the 80TTB deductions; it's exclusively for
senior citizens.
Understanding these tax rules helps you manage your savings and deposits wisely, ensuring
you maximize your earnings while staying tax-compliant. So, make informed financial
decisions and make your money work for you!
Author Bio:
Naina Rajgopalan has a thing for numbers and a deep fascination to learn about
all things finance. She's been money-wise from a young age and has always shared her
knowledge and tips with those around her. Being a part of the content team at Freo, a
neobank that offers flexible and customised financial products, along with benefits such as
insurance on balance, safe & secure banking, and so on, Naina stays updated with the latest of what happens in the banking and fintech industries. She has taken upon herself to share her knowledge with readers across all walks of life to help them manage their finances and budgets better, so they can make better decisions while spending, borrowing, investing and saving.