Is Savings Account Interest Rate Taxable

Savings Account is one of India's most widely used bank accounts. Besides being one of the safest financial avenues to keep your money, a Savings Account also helps you earn interest. But how is a Savings Account interest calculated? And is Savings Account interest taxable? Let's find out.

Despite many savings and investment options available today, Savings Accounts remain an important banking tool for the following reasons:

• Safe Option

Savings Account is one of the safest options to keep your hard-earned money. The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI), insures both principal and interest up to a maximum of INR 5 lakhs for deposits held with an RBI-licenced bank.

• High Liquidity

Savings Accounts have high liquidity. You can easily deposit or withdraw money from your Savings Account anytime.

• Primary Place to Park Money

It is convenient to park your money in a Savings Account and use that account as a base for various money transactions.

As per RBI guidelines, interest is calculated daily on the closing balance of a Savings Account. However, the interest is deposited into the account monthly, quarterly, or half-yearly. For instance, if you open AU Savings Account with an AU Small Finance Bank, you get a higher interest rate and Monthly Interest Payout.

Following is the formula to calculate Savings Account Interest Rate.

Let’s assume that you open an instant online Savings Account that offers a Monthly Interest Payout with an interest rate of 3.50% p.a. If, for the first month (30 days), you maintain a balance of INR 90,000, here’s how the interest will be calculated-

Savings Account Interest = 90,000 *30 * (3.5%/100) / 365 = INR 259

The interest earned from a Savings Account is known as "Income from other sources," which needs to be mentioned when you file your Income Tax Return (ITR). However, tax exemption on Savings Account interest will depend on the tax regime you choose while filing your ITR.

• If you choose the New Tax Regime, which was introduced in Budget 2020, you'll not get any tax exemption on the interest you earn from your Savings Account

• On the other hand, if you opt for the Old Tax Regime, you can get tax exemption on Savings Account interest, as discussed in the next section

Annual interest of up to INR 10,000 on a Savings Account is tax-free. So, the Savings Account interest is taxable over the limit of INR 10,000. For instance, if you have earned a total interest of INR 12,000 in a year from all your Savings Accounts, the amount of INR 2,000 (12,000-10,000) is the savings interest taxable for that financial year.

Remember, interest on a Savings Account is taxable from all the sources. For example, if you have four different Savings Accounts in your name, your tax applicability will be calculated on the total interest earned from all these four Savings Accounts combined in a financial year.

For individuals below the age of 60 years, Section 80TTA of the Income Tax Act of 1961 grants tax deductions of up to INR 10,000 on the interest income from the following sources.

• Bank Savings Account

• Savings Account with a cooperative society indulged in banking activities

• Post Office Savings Account

Section 80TTB provides tax deductions similar to Section 80TTA. However, the following features make it differ from Section 80TTA.

• It applies only to senior citizens aged 60 years or above

• A tax deduction of INR 50,000 is applicable

• Unlike 80TTA, which only provisions for interest from Savings Accounts, 80TTB allows tax deductions on interests earned on bank savings and Fixed Deposits, Post Office Deposits, and Deposits held at Cooperative Societies engaged in the banking business

• Savings Accounts are an important saving tool for most people

• A regular habit of savings can help you achieve short & long-term goals

• Also, now that you know the tax liabilities and deductions associated with the interest earned on your Savings Account balance, make the most of it to enhance your savings this financial year

If you reside in India, are 18 years or above, and have the necessary KYC documents, then you can open a Savings Account with an AU Small Finance Bank via our AU Video Banking facility. Alternatively, you can visit our nearest bank branch or get in touch with us at 1800-1200-1200. 

* Terms and Conditions apply. Rates are subject to change at the sole discretion of AU Small Finance Bank.