Depositing your funds in a savings account is a prudent money-management practice. Your money lies safe with the bank, and you are less likely to spend it as opposed to cash! A savings account also offers a great deal of liquidity, as you can withdraw your funds at any time. If you want to grow your money further, you can even open a fixed deposit account with the bank.
With a savings account, your idle money is put to good use and earns a modest rate of interest. This rate will vary across banks and also depends on the prevailing economic conditions. Given that this interest is an income you earn, it attracts a tax according to the country’s tax laws. Let’s understand tax implications and exemptions on a savings account.
How Savings Interest Income is Taxed
When you deposit money in a savings account, the bank uses it to extend loans to its borrowers, on which it charges an interest rate. Thus, the bank pays you for using your deposits to generate revenue. This is essentially why savings accounts offer an annual interest on deposits.
On your Income Tax Return, the interest you’ve earned from your savings account is listed under the section called ‘Income from Other Sources.’ The tax rate applicable depends on the tax slabs prescribed by the law and your taxable income. The interest is added to your income from all the other sources, and the resulting amount is the actual taxable income.
Tax Exemption on Interest Income
As per section 80TTA of the Income Tax Act, you can enjoy tax exemptions on the interest earned. Below are the details:
● The interest earned is exempt from tax for an amount up to Rs. 10,000 in one financial year.
● If the amount of interest earned exceeds Rs. 10,000, it is taxable and must be filed under ‘Income from Other Sources’ in your tax returns.
● Note that the Rs. 10,000 limit includes the sum of all interests earned from all savings accounts held by an individual or Hindu Undivided Family (HUF). So if you have multiple savings accounts with a number of banks, the income from interest will be the cumulative interest earned from all of these accounts.
● Say, your interest income in a financial year is Rs. 30,000. Minus the exemption limit, Rs. 20,000 will be added to your taxable income
While filing your tax returns, start by collecting and filing all your savings bank account statements for the previous financial year. Look for the interest earned via your savings account in the deposits column. Depending on your bank, your statement could show interest being credited as an annual, biannual or quarterly amount.
Start Your Financial Journey with a Savings Account
Want to begin a disciplined financial journey with proper planning? Open a savings account online from the comfort of your home!
Managing a savings account is easy with online and mobile banking interfaces. Choose a reputed and new-age bank that offers innovative banking services to open a savings account with.
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