Interest on Saving Bank Account : Tax, 80TTA
Savings Bank Account is the most common account for individuals. When you have money in bank savings account, your money earns interest. That means that you get paid for keeping your money in the account. This article explains how is the interest calculated on saving bank account, how is it taxed, what is section 80TTA? How does it impact tax on interest from saving bank account? What is the 10,000 limit deduction? Is it for one account or multiple accounts?
How is the interest calculated ?
The interest is calculated on the daily balance in your account. Before Apr 2010 the interest was calculated on the lowest amount in the bank account between the 10th of every month and the last business day of the month.In Apr 2010 RBI moved to calculation on daily basis
Say on 1st Aug Rs 70,000 is credited into your account. On 5th August after some withdrawls balance in your account is Rs 55000. You had Rs 70,000 for 4 days. Suppose interest is 4% per annum. So how much interest did you earn? The formula is:
Interest = Principal or amount in the account * Number of days * Daily Interest Rate
Daily Interest Rate = Interest rate per annum /365 days
At 4% Daily Interest Rate is: 4%/365 = 0.010958%
Example of calculation of interest on Saving Bank Account?
Say Sodhi had an balance of Rs 85,000 on April 1. He received a payment of Rs 300,000 on April 15 from the sale of some mutual fund units. On April 29, he made a payment of Rs 320,000. This resulted in his account balance reducing to Rs 65,000.
- For the first 14 days of April, interest to be paid would be calculated on Rs 85,000 i.e 130.41
- For the next 14 days of April, interest to be paid would be calculated on Rs 385,000 i.e 590.68
- For the balance 2 days, interest to be paid would be calculated on Rs 65,000. i.e 14.25
- Total interest earned is 735.34 Rs
Our article Saving Bank Account:Do you know how interest is calculated and more explains it in detail.
When is the interest credited to the account?
Though interest rate calculations are done on daily basis it is credited to the account only at the end of each quarter or the half year. At present, each bank follows its own schedule including monthly, quarterly and and half yearly for paying interest rates on savings accounts. For example HDFC banks credits interest on 31st Oct and 31st Mar, State Bank of India on 30 June and 31 Dec.
How interest rate on Saving Bank account have changed over the years?
Interest rate on Saving bank account has been around 4% but was about 6% in 1992. From 2003 to Jul 2011 Interest rate was constant at 3.5 %. Every bank had to offer the same interest rate to all it customers. It was regulated by Reserve Bank of India till Oct 2011
Deregulation: On 25th Oct 2011 Reserve Bank of India(RBI) deregulated the saving bank interest rates. The banks will have to offer uniform interest rate on deposits in saving account up to Rs 1 lakh. For savings deposits above this amount, the banks will be free to offer differential interest rate. In 2011 RBI set the minimum interest rate as 4% for upto 1 lakh amount in Saving Bank.
Why do different Banks offer different interest rates?
Reserve Bank of India deregulated interest rates on savings accounts in India in October 2011 and banks are now free to decide the same within certain conditions imposed by RBI. From Best Interest Rates on Saving Account Maximum Rate of Interest on Saving Accounts for balance upto 1 lakh is given in table below :
|Name of the Bank / Institution||Interest Rate||From|
|Kotak Mahindera Bank||5.50%||01-Nov-2011|
|The Ratnakar Bank||5.50%||01-Nov-2011|
Is Interest in Saving bank account taxable?
Interest earned on Saving Account is considered as Income from other Sources. This needs to be declared in your income tax returns. No TDS is deducted from the interest on Saving Bank Account. Before 1st Apr 2012 it was taxed based on your income slabs.
From FY 2012-13 under the new section 80 TTA of the Income-tax Act, deduction up to an extent of Rs 10,00 in interest from all the bank accounts is allowed to an individual or Hindu undivided family, Interest over Rs 10,000 will be taxed at marginal tax rate of an individual. This is applicable from the assessment year 2013-14(Financial Year 2012-13) and subsequent assessment years.
What is Section 80TTA of Income Tax Act?
The Finance Bill or Budget 2012 inserted a new section 80TTA in the Income Tax Act of 1961 which provides
- Deduction up to Rs. 10,000 to an Individual / HUF from Gross Total Income towards Interest on saving bank Account (not being time deposits)
- This deduction is not provided to saving account of a firm, an association of persons or a body of individuals,
- Saving bank account should be maintained with a bank or society or post office.
- The deduction allowed is interest received or Rs. 10,000 whichever is lower.
- If interest earned is more than 10,000 then balance amount will be taxable as before i.e considered as Income from Sources and taxed as per your slab rate.
- The deduction is in addition to deduction of Rs. 1 Lakh of section 80C of the Income Tax Act-1961.
- Please note that Interest from Saving Bank Account is not exemption but a deduction. Our article Exempt Income and Income Tax Return explains exempt Income in detail.
- The interest earned on savings account is exempted from TDS under Section 194 A of Income Tax Act i.e No TDS is deducted on interest from saving account.
- The section is applicable from April 01, 2012 and will apply from AY 2013-14 and onwards.
For example , If the interest on saving bank account received is Rs. 12,500, then effectively only Rs. 2,500 will be taxable.
The deduction available under Section 80TTA makes the scheme of non-filing of returns by salaried taxpayers in case of salary income plus savings bank interest up to Rs 5 lakh more friendly.
Is the deduction per saving bank account or all saving bank accounts together?
The deduction towards interest on all saving accounts taken together cannot exceed Rs. 10,000. This deduction is available on interest income from all savings bank accounts that a taxpayer might have in banks, cooperative societies or post offices.You cannot have multiple deductions for multiple savings bank accounts
Example : If you get Rs. 21,250 from three saving accounts, you will be entitled for Rs. 10,000 only as deduction under section 80TTA & the balance amount of Rs. 11,250 will be taxable as earlier.
How much money should be in the account(s) at what interest to earn 10,000 interest income?
To earn an interest income of Rs 10,000, one needs to have
- Rs 1.6666 lakh at 6% (.06 * 166660)
- Rs 1.42 lakh at 7%
- Rs 2.5 lakh at 4%
How to show Interest on Saving Bank account in Income Tax Return?
As discussed in our article, How to Calculate Income Tax, tax on Income earned in India depends on type of Income for example: Income from Salary or Pension, Income from House Property etc. Income Interest from Saving Bank Account comes under the category of Income from Other Sources as shown in picture below from ITR2 and ITR1. Our article Income from Other Sources discusses it in detail.
This year Income Tax Return Forms have the new section 80TTA in Deductions under Chapter VI-A along with 80C, 80D as shown in picture below for ITR1.(It’s similar for ITR2)
You need to add interest from saving account to Income from other sources and then claim deduction under section 80TTA. If your total interest income from ALL your saving bank accounts
- is less than or equal to Rs 10,000 For example if your interest from ALL saving bank accounts is Rs 7,000 you need to show 7000 in income from other sources and then show Rs 7000 for section 80TTA . For example 6990 shown in image of Income from other sources
- is more than Rs 10,000 say 15,000 then add 15,000 to Income from other sources and then show Rs 15,000 in Section 80TTA. ITR should automatically give you deduction for 10000 and calculate tax on rest.
Note: If your interest income from Saving Bank account is more than 5000 you can still use ITR1 as this is a deduction and not exemption For details on exemptions read Exempt Income and Income Tax Return
Thanks to our reader Vaibhav for asking about how to show in Income Tax Return. And Vicky for correcting that it is deduction and not exemption.
Related articles :
- Saving Bank Account:Do you know how interest is calculated and more
- Best Interest Rates on Saving Account
- Income from Other Sources
Don’t forget to take advantage of section 80TTA and save tax on interest income upto 10,000. Is interest on your saving bank account is more than 10,000? How much do you keep in your saving bank account?