Tax on Savings Bank Account Interest Income

Income from other sources is a vital category under the Income Tax Act that includes earnings not covered under primary heads like salary, house property, or business income. One common inclusion is interest earned on savings accounts, which offers financial security and steady returns. The interest is calculated on the daily balance and credited periodically, making it an accessible yet taxable income. While Sections 80TTA and 80TTB provide deductions for individuals, HUFs, and senior citizens, understanding the taxation rules is crucial for optimizing savings. In this blog, we’ll explore the meaning and benefits of savings accounts, how interest is calculated and taxed, key points on taxability, and a step-by-step guide to reporting savings account interest in your ITR. Stay informed to make the most of your finances!

Meaning of Savings Account

A savings account is a basic financial product offered by banks and financial institutions, allowing individuals to safely deposit their money while earning interest on the balance maintained. It is a secure and accessible account designed to promote savings among individuals, enabling them to manage daily transactions efficiently while benefiting from modest returns. For taxation purposes, the interest earned on these accounts is categorized as “Income from Other Sources” under the Income Tax Act.

Benefits of Savings Account

Savings accounts are a versatile financial tool offering multiple advantages:

  1. Liquidity: Provides easy access to funds for everyday transactions through ATMs, online banking, and mobile apps.
  2. Interest Earnings: Generates returns on idle funds through interest credited periodically.
  3. Safety: Deposits in scheduled banks are insured up to ₹5,00,000 under the Deposit Insurance and Credit Guarantee Corporation (DICGC).
  4. Convenience: Facilitates bill payments, fund transfers, and automatic debits for recurring payments.
  5. Tax Benefits: Interest earned is eligible for deduction under Section 80TTA for individuals and HUFs, with enhanced benefits for senior citizens under Section 80TTB.

How is Interest Earned on a Savings Account Calculated?

Interest on a savings account is calculated based on the daily closing balance. Banks use the following formula to compute interest:

Interest = (Daily Closing Balance × Interest Rate × Number of Days) / 365

Key points to note:

  • Interest rates vary between banks and are typically in the range of 3–6% per annum.
  • The interest is credited quarterly or semi-annually, depending on the bank’s policy.
  • While the interest is compounded periodically, it is taxable as “Income from Other Sources.”

Understanding how interest is calculated can help you manage your savings effectively and ensure better financial planning.

Tax on Savings Account Interest

The interest earned on a savings account is considered “Income from Other Sources” under the Income Tax Act and is fully taxable. While the interest itself is not subject to TDS (Tax Deducted at Source), taxpayers must include it in their gross total income and pay tax as per their applicable income tax slab.

What is Section 80TTA?

Section 80TTA of the Income Tax Act provides a deduction on interest earned from savings accounts held with banks, post offices, or cooperative societies.

Key features of Section 80TTA:

  • Eligibility: Available to individuals (excluding senior citizens) and Hindu Undivided Families (HUFs).
  • Deduction Limit: Up to ₹10,000 per financial year.
  • Applicable Accounts: Savings accounts held with scheduled banks, post offices, or cooperative banks.
  • Exclusions: Interest from fixed deposits, recurring deposits, or other term deposits is not covered under this section.

This deduction helps taxpayers reduce their taxable income, promoting the habit of savings while easing the tax burden.

What is Section 80TTB?

Section 80TTB is a provision introduced exclusively for senior citizens (aged 60 years and above), offering a higher deduction on interest income.

Key features of Section 80TTB:

  • Eligibility: Only senior citizens with savings accounts, fixed deposits, or recurring deposits.
  • Deduction Limit: Up to ₹50,000 per financial year on total interest income.
  • Scope of Interest: Includes interest earned from savings accounts, fixed deposits, and recurring deposits with banks, post offices, or cooperative banks.
  • Exclusions: Does not apply to non-senior citizens or interest income from corporate bonds and other investments.

Section 80TTB provides financial relief to senior citizens, considering their reduced earning potential post-retirement.

taxation of savings bank account interest income

How to Report Savings Bank Interest in Your ITR

  1. Gather Required Details: Collect information about the total interest earned from savings accounts during the financial year. This is available in bank statements or passbooks.

  2. Choose the Right ITR Form: Use the appropriate income tax return (ITR) form based on your income sources. For example, ITR-1 is commonly used by salaried individuals with simple income structures, including interest income.

  3. Declare Income Under “Income from Other Sources: In the ITR form, locate the section for “Income from Other Sources” and enter the total interest earned from savings accounts.

  4. Claim Deduction Under Section 80TTA or 80TTB: In the deductions section (Chapter VI-A), claim the applicable deduction:

    • Up to ₹10,000 under Section 80TTA for individuals (excluding senior citizens) and HUFs.
    • Up to ₹50,000 under Section 80TTB for senior citizens.
  5. Compute Taxable Income: The deduction will reduce the taxable portion of your savings account interest. Add the remaining taxable income to your gross total income.

  6. File Your Return: Once the details are filled and reviewed, submit your ITR on the Income Tax Department’s e-filing portal. Ensure the interest income is accurately reported to avoid notices or penalties.

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