A savings account keeps your money safe, offers easy access, and helps you manage everyday expenses. It’s a simple and reliable way to handle your finances. Beyond just storing your money, it also earns interest over time—adding to your savings. But the earned interest on a savings account isn’t completely tax free. The government considers it part of your income, which means it is taxed based on how much you earn. However, there are certain deductions available that can help reduce your tax burden. Knowing how these deductions work can make tax filing easier and ensure that you don’t pay more than you need to. Let’s understand the details.**
Understanding a Savings Account?**
In simple words, a savings account is a deposit account offered by banks to help individuals store money in a secure manner while also earning interest on the balance. It allows you to deposit funds safely, withdraw them when needed, and manage transactions without any hassle. The interest that banks pay on the balance you maintain is based on a set percentage, and the amount is credited periodically. Bank policies, market conditions, and regulatory guidelines determine the savings account interest rate.
Despite offering lower returns compared to other investment plans, savings accounts remain popular due to their liquidity, safety, and ease of access. However, you should not overlook the tax implications of the interest earned, as it can impact your overall tax liability.
Taxation on Savings Account Interest**
Money earned from the interest on savings accounts is considered part of your taxable income as ‘income from other sources’. It is taxed according to your applicable income tax slab. However, the Income Tax Act provides certain deductions to reduce this tax burden.
Section 80TTA
- Eligibility: Available to individual taxpayers below 60 years of age and Hindu Undivided Families (HUFs).
- Deduction Limit: Allows a deduction of up to ₹10,000 per financial year on interest earned from savings accounts held with banks, post offices, or cooperative societies.
- Applicable Interest: Only interest from savings accounts is eligible; interest from fixed deposits or recurring deposits does not qualify under this section.
Section 80TTB
- Eligibility: Specifically designed for senior citizens aged 60 years and above.
- Deduction Limit: Permits a higher deduction of up to ₹50,000 per financial year on interest income.
- Applicable Interest: Includes interest earned from savings accounts, fixed deposits, and recurring deposits held with banks, post offices, or cooperative societies.
To claim these deductions, calculate the total eligible interest income for the financial year and report it under the respective section when filing your Income Tax Return (ITR). Ensure that you do not claim deductions under both sections simultaneously; choose the one that applies to your situation. You can also use online tools like an income tax calculator or Fixed Deposit calculator to get a better idea of your interest earnings and overall tax liability.
Note: Unlike fixed deposits, where banks deduct TDS at 10% if the interest exceeds ₹40,000 (₹50,000 for senior citizens), savings account interest does not typically attract TDS.
How to Report Interest on Savings Account in ITR**
Accurate reporting of interest income is essential to ensure compliance with tax laws and avoid penalties.
Step 1. Calculate total interest earned:
Obtain an interest certificate from the bank or check account statements. Sum up the interest earned from all savings accounts during the financial year.
Step 2. Include in ‘income from other sources':
Enter the total savings account interest in the ‘income from other sources’ section of the ITR form.
Step 3. Claim deductions (if applicable):
If eligible for Section 80TTA or 80TTB, deduct the exempt amount before computing total taxable income.
Is a Savings Account and a Savings Plan the Same?**
Since they sound similar, it is easy to get confused between a savings account and a savings plan. However, the two are not the same. Let’s break down the differences:
Purpose:
A savings account is intended for everyday transactions—it keeps your money secure and readily available for immediate use. In contrast, a savings plan is designed for long-term financial growth by helping you achieve specific goals through structured, disciplined saving.
Contributions:
With a savings account, you have the flexibility to deposit money as and when needed. A savings plan, however, typically requires regular, scheduled contributions, which encourages consistent saving habits over time.
Returns and Benefits:
Savings accounts earn modest interest that is calculated daily and credited periodically, providing a steady but limited growth of your funds. Savings plans may offer the potential for higher returns by incorporating investment options or insurance benefits, although these returns can be subject to market fluctuations.
Liquidity:
Money in a savings account is highly liquid, allowing for easy and penalty-free withdrawals whenever necessary. Savings plans are generally less liquid because they are structured to promote long-term savings, often imposing restrictions or penalties on early withdrawals.
Taxation:
The earned interest on a savings account is considered taxable income, though deductions under sections like 80TTA or 80TTB can help reduce your tax liability. Some savings plans may offer additional tax advantages as part of their structure, making them potentially more tax efficient over the long run.
Understanding savings account interest rates and how it is taxed can help you stay on top of your finances and avoid surprises during tax filing. While the interest earned adds to your savings, it’s important to account for its tax implications and take advantage of available deductions to reduce your tax burden. By accurately reporting interest income and claiming the right exemptions, you can ensure compliance while also optimising your savings. Staying informed about tax rules helps with better financial planning and prevents you from paying more than necessary.**
**Tax exemptions are as per applicable tax laws from time to time.
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