We all have a tendency of checking the amount of Interest on Savings Account earned during the year, but do we know the manner in which this Interest is computed and the Tax on Interest on Savings Account that would be liable to be paid. Through this article, we’ll try to give you some insights about such points and tax deduction of interest under Section 80TTA
Interest Rate on Savings Account
Earlier the Interest Rates on Savings Account were fixed by the RBI and was 4% p.a. These Interest Rates were controlled by RBI and all banks were required pay the same interest rates irrespective of the amount of money kept in the Bank.
But on 25th October 2011, RBI de-regularized this system of fixing the Interest Rates. This de-regularisation meant that all Banks were now free to fix the Interest Rates to be paid. This lead to different banks paying different interest rates and this is how it should be in a free economy.
Moreover, RBI stated that Banks can also opt for the option of paying differential interest rates i.e. it can pay a differential interest rate if the amount is less than Rs. 1,00,000 and a different interest for amount over Rs. 1,00,000.
After this announcement of de-regularisation of Interest Rates, different banks have started paying different interest rates. To get more customers to open saving bank accounts in their banks, banks have also started offering a higher interest on savings account which has ultimately benefitted the customer. From 4% p.a. being paid on Savings Account prior to the deregulation, the Interest Rates have shot up considerably with some banks paying as high as 6-7 % p.a.
Computation of Interest on Savings Account
Another change which has come after this de-regularisation of Interest Rates is in the manner of computation of Interest. Earlier, Interest was paid on the minimum balance kept in the bank account during the month. Thus, if you had Rs. 90,000 in your bank account for the whole month and for 1 day the balance was Rs. 10,000, you would be paid Interest only on Rs. 10,000 and not on Rs. 90,000 (An easy example has been taken for the purpose of understanding).
But now, this has changed and the Interest is paid on a daily basis on the end of day balance in the account. This has again benefitted the customer as they would now be earning more interest not only due to higher interest rates but also due to the change in the manner of computation.
Tax on Interest on Savings Account
Interest on Savings Account was earlier taxable as per the Slab Rates. But w.e.f 1st April 2012 an amendment has been brought in the Income Tax Act and a deduction of Rs. 10,000 is allowed under Section 80TTA for Interest earned on Deposits from
- Saving Bank Account
- Co-Operative Bank
- Post Office Savings Schemes
The amount earned over and above this Rs. 10,000 would be liable to tax as per the Income Tax Slab Rates. This deduction is only available to Individuals and HUF’s and is over and above the deductions provided under Section 80C.
Deduction under Section 80TTA was announced after the Finance Ministry last year announced that Individuals earning Salary of less than Rs. 5,00,000 and Interest of less than Rs. 10,000 are not mandatorily required to file their Income Tax Returns if all the TDS has been deducted.
The taxpayer is requested to note that this is a deduction and not an exemption. Therefore, it would first be included in the total income of an assessee and would then be allowed as a deduction under Chapter VI-A.
Difference between Interest on Savings Account and Fixed Deposit
Under a Fixed Deposit, you are required to deposit the amount with the bank for a fixed period whereas in a savings account, you can withdraw the amount anytime. As the amount in a fixed deposit is with the banks for a fixed period, it pays a higher interest as compared to the interest on savings account.
However, No deduction is allowed from the Interest earned on Fixed Deposit and it is taxable as per the Income Tax Slab Rates of the recipient individual. Moreover, TDS @10% is also deducted on the Interest on Fixed Deposit if the Interest earned is more than Rs. 10,000.
On the other hand, a deduction of Rs. 10,000 is given for Interest on Savings Account. Moreover, No TDS is deducted from the Interest on Savings Account irrespective of the amount of Interest earned. The Income earned from Interest (whether from Savings Account or Fixed Deposit) is disclosed under head – Income from Other Sources.
Even though, a deduction of Rs. 10,000 is given on the Interest on Savings Account and not on Fixed Deposits, still Fixed Deposits are advisable as the Interest paid on Fixed Deposits is substantially higher as compared to the Interest paid on Savings Account.
PPF Account is also a good investment option for someone interested in investing in Tax Free Fixed Income earning Investments. Recommended Read: Benefits of Investing in PPF Account