While most of us have one or more savings accounts, very few would be aware of the interest earned and calculate the tax implications around them. Most banks offer an interest rate of 4% on savings accounts. However, this may go as high as 7% under certain schemes offered by some banks. The interest earned by the account holder attracts no tax up to a certain limit. But once the threshold limit is breached, the beneficiary has to pay tax on the excess interest amount.
According to section 80 TTA of the IT Act, a person can save a maximum of Rs 10,000 on his total interests earned from savings accounts in a financial year. Any income over that, will attract taxes. The exemption is applicable only for individuals.
How to Calculate the Tax That are Taxable Amount and TDS?
When interests earned on all savings accounts are below Rs 10,000, the account holder is exempted from the income tax irrespective of the tax slab he falls into but when the income from interests exceeds the exempted limit, the amount above Rs 10,000 becomes taxable and should be mentioned under “Income from Other Sources” while calculating the gross taxable income.
For example, if a person has 3 savings accounts and he earns an interest of Rs 8,000, Rs 10,000 and Rs 12,000 on each of his accounts respectively in a financial year, his total income from interests is Rs 30,000. It should not be assumed that the assessee will have to pay tax only on the interest earned from the third savings account because it is more than Rs 10,000. He will have to pay income tax on Rs 20,000 depending on the tax slab he falls into.
Deduction Limit in Savings Account
Account holders can save a part of their interest income from being taxed. The interest amount earned from all savings accounts is added together. If the amount is below Rs 10,000, no tax is levied on interests. But if the amount exceeds Rs 10,000, the excess amount is taxable.
Under Section 10(15)(i), an assessee can save up to Rs 3,500 in case of individual accounts and up to Rs 7,000 in case of joint accounts if interests are earned through Post Office savings accounts. The exemption under Section 10(15)(i) can be claimed in addition to the deduction made under section 80 TTA.
Computation of Interests by Banks
Banks modify their methods of interest calculation from time to time to provide maximum benefits to depositors. Earlier, the interest was offered on a monthly basis. Banks calculated interests on the minimum balance available in the account in that month. For example, if a person maintained Rs 5 lakhs in his account throughout the month, but his balance fell to Rs 1 lakh for a day and he again maintained Rs 5 lakhs in the account for the rest of the month, the bank would have provided interests keeping Rs 1 lakh as the principal value.
At present, banks have adopted a realistic approach under which the interest is offered on a daily basis. Interests are given on the amount present in the account at the end of the day. Thus, beneficiaries get higher benefits on their deposits.