Deductions Under Section 80TTA: Tax on Savings Account Interest
Nimisha Panda- 2 days ago
- 7 min read
The question of whether interest earned from savings accounts is taxable is one that many people have. The answer is that interest earned over a certain amount is taxed similarly to income. Interest on savings and investments, which includes savings accounts, post office programs, fixed deposits (FDs), and recurring deposits (FDs), is included in this category. However, there are ways to lower your tax liability, such as Section 80TTA, which can save taxes on interest received up to Rs 10,000. In this article, we will discuss how you can make tax savings with the help of Section 80TTA.
Table of Contents
Calculation of Interest on Savings Accounts
Any amount credited as interest on a savings bank is considered income for the taxpayer and must be disclosed under the head Income from other sources on his or her income tax return (ITR). The RBI's guidelines state that interest on a savings account is calculated daily on the closing balance each day, even though the calculation is done on a recurring basis. The interest is credited to the account on a monthly, quarterly, or half-yearly basis, depending on the circumstances.
Illustration: Interest per month on savings account= Daily closing balance * Rate of interest * Number of days / (Days in a year)
For instance, if there is a daily balance is Rs. 5 lakh in your account and the interest your bank pays on your savings account is @6% per annum, the calculation of the interest component will be as follows:
Interest per month = Rs. 5 lakh * .06 * 30 / 365 = Rs. 2465
Deductions on Tax on Savings Account Interest
Under the heading of income from other sources on the tax return, the interest that accumulates in the savings bank account should always be reported. TDS is not withheld by the banks from savings bank interest. The investor's applicable income tax slab rates determine how much interest is taxable on the savings account. In this context, it's also important to remember that interest received from the savings account may also qualify for a deduction under Sections 80TTA and 80TTB.
Interest earned from all savings bank accounts up to Rs 10,000 is exempt from taxation under Section 80TTA of the Income Tax Act. This holds true for savings bank accounts, post offices, and cooperative banks. The excess amount is deductible from taxes if the interest received from all of these sources exceeds Rs 10,000. This implies that an individual will be required to pay income tax on Rs 10,000 if he receives Rs 20,000 in interest. Because savings accounts have relatively low interest rates and can also be lowered by income tax due, it is usually advised to maintain a minimum balance. For an individual in a 30% tax slab with 4% interest, the rate is nearly 2.8% per annum.
On the other hand, Section 80 TTB, which is designed especially for senior citizens, relieves their tax burden on interest income and ensures their financial security in retirement by allowing them to deduct a larger amount of up to Rs. 50,000 annually from interest income received from savings accounts and fixed and recurring deposits.
What is Section 80TTA?
For any citizen of the nation who is 60 years of age or younger. In any given fiscal year, interest earned up to Rs 10,000 is not tax deductible. The following interest income sources are eligible for this deduction under this section:
A bank savings account
Savings account with a cooperative society that conducts banking operations
Post Office savings account
Notably, senior citizens are not eligible for the benefits of section 80TTA. According to Section 80TTB, older citizens are free from paying taxes up to Rs 50,000. The TDS deduction for savings account interest is not available. Tax is withheld from NRIs at the source, meaning that 30% TDS is applied to interest received on Non-Resident Ordinary (NRO) accounts. Also, there is no tax imposed on Non-resident External (NRE) accounts.
Types of Interest Not Eligible to Section 80TTA Deduction
The following types of interest income are excluded from the Section 80TTA deduction:
Income from interest received on the bank's fixed deposit.
Interest received from the bank's recurring deposit.
Any interest received from term deposits.
Any amount deposited by financial institutions (that are not banks).
Interest received from bonds and corporate debentures.
What is Section 80TTB?
Section 80TTB is in charge of giving senior citizens over 60 a deduction of up to Rs 50,000 per year on interest on savings accounts and fixed deposits; the same deduction applies to interest on fixed deposits. The deductions offered to senior citizens and others differ in that the former is valid for both savings account and fixed deposit interest, while the latter is only applicable to savings accounts.
Reporting Savings Bank Interest in ITR
Tax compliance requires that you report savings bank interest on your income tax return. First, you must understand that savings bank interest is taxable under "Income from Other Sources," with an exemption limit of Rs. 10,000 for individuals and Hindu Undivided Families (HUF) under Section 80TTA and Rs. 50,000 for senior citizens under Section 80TTB. Next, you must collect your bank statements to calculate the total interest earned during the fiscal year. Finally, when you fill out your income tax return, choose the appropriate form (ITR-1 or ITR-2 for individuals), and enter the total interest income under "Income from Other Sources." Make careful to bring up the exemption if the interest is less than the cap. Complete the other ITR form sections, such as additional income information, deductions, and tax payments, after entering the interest income.
Steps to Claim Section 80TTA Deduction
Step 1: The first step in claiming the deduction under Sec 80TTA is to ascertain the eligibility requirements. Only individuals and members of Hindu undivided families are eligible to claim the deduction; partnership firms, LLPs, and other entities are not.
Step 2: For eligible individuals, the next step is to determine the interest income they received from the bank, post office, or cooperative society bank during the fiscal year. The interest income requires proper documentation to be kept.
Step 3: Taxpayers must include interest income in their total income after determining the deduction amount. This is important because total income is used to determine an individual's tax liability.
Step 4: Next, figure out the deduction amount, which for interest income is up to Rs. 10,000. An individual is eligible for a full deduction if their interest income is Rs. 10,000 or less. If it exceeds Rs. 10,000, however, a deduction of up to Rs. 10,000 may be made.
Step 5: Subsequently, the annual income tax return must be filed. For a claim deduction, however, ensure that the interest income is included under "Income from Other Sources" on the form. Additionally, if necessary, include supporting documentation.
Step 6: For a claim submitted under Section 80TTA, the tax authorities may want supporting documentation such as bank statements, passbook entries, and more. The paperwork is required for the income tax audits and verification processes.
Conclusion
One of the most important parts of the Income Tax Act is Section 80TTA. It facilitates interest income deductions and enhances individual and HUF financial management. However, before claiming a tax deduction under Section 80TTA, you must confirm that the eligibility criteria are met. Also, while filing a claim, make sure to keep all the relevant evidence ready. Seeking expert assistance is the best move to maximise the deductions you are entitled to.
FAQ
Q1. Is savings bank account interest taxable?
Interest earned up to Rs 10,000 from each savings bank account is exempt from taxation under Section 80TTA; however, any additional income will be subject to taxation.
Q2. Does TDS get deducted on savings bank account Interest?
No TDS is withheld from interest earned on an individual or Hindu Undivided Family's savings bank accounts, but it becomes taxable in the account holder's hands when it exceeds a specific threshold.
Q3. Are Section 80TTA deductions applicable to bank fixed deposits and recurring deposits?
No, Section 80TTA only allows for the deduction of interest on deposits made into savings accounts, not time deposits made with banks, cooperative societies, or the post office.
Q4. Are savings bank accounts liable for TDS deduction by banks?
No, interest earned on FD is subject to TDS.
Q5. If I earn interest from multiple savings accounts, can I still claim a deduction on all of them?
Yes, but the total amount is Rs 10,000.
Q6. Am I eligible for Section 80TTA deduction for a savings bank account in a Cooperative Society?
Yes, you can claim a Section 80TTA deduction if you have a savings bank account in a registered cooperative society.
Q7. What is the maximum deduction under 80TTA?
The maximum deduction allowed by Section 80TTA is Rs. 10,000.
Q8. How to avoid tax on savings account interest?
You can use Section 80TTA to deduct up to Rs. 10,000 from the total interest earned from all of your savings accounts combined.
Q9. Do I have to disclose interest earned on the balance in my savings bank account?
Yes, according to the Income Tax Act, everyone for whom a return filing is applicable must report all of their income received during the period for which they are filing the return and pay the applicable taxes on it.
Q10. What will be the consequences of failing to report the interest income earned on the balance in a savings bank account?
If someone intentionally or unintentionally fails to report their income during a year, they will be subject to penalties for non-compliance and will have to pay the tax and interest when their return is selected for review.
Q11. How to claim a deduction under Section 80TTA?
By filing your income tax return, you are eligible to get a deduction under Section 80TTA. Prior to claiming the Section 80TTA deduction, the income must first be included in your income under the heading "Income from other sources."
Comments