It is prudent money management practice to deposit your funds in a savings account. Your money is safe in the bank and you are less likely to spend it than cash! A savings account also offers great liquidity, as you can withdraw your funds at any time. If you want to grow your money more, you can even open a fixed deposit account with the bank.
With a savings account, your unused money is put to good use and earns a modest interest rate. This rate varies from bank to bank and also depends on current economic conditions. Since this interest is income that you earn, it is taxable under the tax laws of the country. Let’s understand the tax implications and exemptions on a savings account.
How interest income from savings is taxed
When you put money into a savings account, the bank uses it to give loans to its borrowers, on which it charges an interest rate. Thus, the bank pays you to use your deposits to generate income. This is basically the reason why savings accounts offer annual interest on deposits.
On your tax return, the interest you earned on your savings account is listed in the section called “Income from other sources”. The applicable tax rate depends on the tax brackets prescribed by law and your taxable income. Interest is added to your income from all other sources, and the resulting amount is actual taxable income.
Tax exemption on interest income
In accordance with article 80TTA of the Income Tax Act, you can benefit from tax exemptions on the interest received. Below are the details:
● Interest earned is tax exempt for an amount of up to Rs. 10,000 in a single financial year.
● If the amount of interest earned exceeds Rs. 10,000, it is taxable and should be filed under “Income from other sources” in your tax returns.
● Note that the Rs. 10,000 limit includes the sum of all interest earned on any savings accounts held by an individual or undivided Hindu family (HUF). So if you have multiple savings accounts with multiple banks, the interest income will be the cumulative interest earned on all of those accounts.
● Let’s say your interest income during a fiscal year is Rs. 30,000. Less the exemption limit, Rs. 20,000 will be added to your taxable income.
When filing your tax returns, start by collecting and filing all of your savings account statements from the previous fiscal year. Look for interest earned through your savings account in the deposits column. Depending on your bank, your statement may show interest being credited as an annual, semi-annual, or quarterly amount.
Start your financial journey with a savings account
Want to start a disciplined financial journey with good planning? Open an online savings account from the comfort of your own home!
Managing a savings account is easy with online and mobile banking interfaces. Choose a reputable and new age bank that offers innovative banking services to open a savings account.
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Posted on: Wednesday September 29, 2021 4:22 PM IST