Savings Account interest is taxable at your slab rate. However interest up to Rs 10,000 is exempt from tax under Section 80TTA. This tax-exempt limit is Rs 50,000 for senior citizens under Section 80TTB. No TDS is deducted on savings account interest. For NRIs, tax is deducted at source (TDS) at 30% on interest on Non-resident Ordinary (NRO) accounts. No tax is applicable to interest on Non-resident External (NRE) accounts.
How interest on savings account is calculated
As per the RBI guidelines, interest on savings account is calculated on a daily basis on the closing balance each day. Although, this interest is calculated on a recurring basis, but it will be credited to your account on a monthly/ quarterly/ half yearly basis (as the case may be).
The below formula is used to calculate interest on a general savings account:
Interest per month = Daily closing balance * Rate of interest * Number of days / (Days in a year)
For instance, if the daily balance is Rs 5 lakhs and the interest offered on savings account is @ 6 per cent per annum, the interest component shall be calculated as follows:
Interest per month = 5 lakhs * .06 * 30 / 365 = INR 246
Income Tax applicability on Savings Account Interest earned:
The interest component earned on a savings account is accounted under the head ‘Income from Other Sources’. This interest income must be declared in your income tax return and will be taxable as per the applicable slab rate. According to Section 19A of the Income Tax Act, 1961, TDS shall not be applicable on a savings account. However TDS is deducted at 30% for NRIs on interest received on NRO accounts. No TDS is deducted on interest received in NRE accounts. Interest earned on a savings account beyond INR 10,000 attracts taxes at your slab rate. Interest on a savings account up to Rs 10,000 is technically treated as a deduction. For example, if your gross total income is Rs 10 lakh and you have savings account interest of Rs 25,000 a deduction of Rs 10,000 will be made from your gross total income.
This deduction is granted under section 80TTA of the Income Tax Act, 1961. This deduction is allowed only to individual and HUF assesses and not firms/companies. Maximum Rs 10,000 per year deduction is allowed for interest earned from all savings accounts held in banks, post offices or co-operative banks. Interest earned beyond Rs 10,000 from any of these sources shall be taxable. For example: Mr. Rishabh earns Rs. 8,500 from interest on savings account. Thus, no tax shall be payable on these earnings. On the other hand, Mr. Mukul earns Rs 17,000 from his savings accounts. He would be required to pay tax at the rates applicable as per his tax slab on Rs 7,000 (Rs 17,000 – Rs 10,000).
This section grants a deduction up to Rs 50,000 per annum to interest on savings accounts and on fixed deposits to senior citizens (those who are above the age of 60). The section also grants the same deduction to interest on fixed deposits. This is a key distinction that marks out the deduction given to senior citizens from the deduction given to all individuals. The former extends to interest from fixed deposits and savings accounts while the latter only extends to interest on savings accounts.