How to Report Interest Income from Savings Account and Avoid Scrutiny

Farheen Mukadam
Aug 7
9 min read

Interest income is a crucial source of income for many taxpayers in India, often coming from savings accounts, fixed deposits, recurring deposits, and other similar financial instruments. It is essential to understand how this income is taxed and how to report it accurately while filing your Income Tax Return (ITR). Incorrect reporting of interest income can result in penalties, interest charges, or scrutiny by tax authorities. Let us understand how to calculate total savings account interest, the taxability of interest income, and how to claim deductions to reduce your tax liability. Additionally, we will walk you through the steps involved in reporting interest income in your ITR and provide useful tips for avoiding scrutiny.

How to Calculate Total Savings Account Interest

Interest earned on savings accounts is generally calculated on a quarterly or yearly basis, depending on the bank's terms and conditions. To calculate the interest income, you need to know the following details:

Balance in the Account: This is the average balance of your savings account over a given period (usually a quarter or year).
Interest Rate: This is the rate of interest provided by the bank for your savings account. It may vary depending on the bank and the type of account.
Interest Calculation Method: Some banks calculate interest on a daily balance, while others may do so on a monthly or quarterly basis. Be sure to check with your bank.

For example, if your bank provides an interest rate of 3.5% per annum, and your savings account balance is ₹50,000, you would calculate the interest earned in a year as follows:

Interest = 50,000×3.5% = ₹1,750

This is the annual interest income you will need to report in your tax return.

Understanding the Taxability and Reporting of Interest Income

Interest income from savings accounts is subject to income tax. However, there are certain exemptions and deductions available that can help reduce the taxable income. The key points regarding the taxability of interest income are:

Taxability of Savings Account Interest: Interest earned on savings accounts is considered as income from other sources. It is fully taxable based on the applicable income tax slab rates.
Exemption under Section 80TTA: Under Section 80TTA of the Income Tax Act, taxpayers are allowed a deduction of up to ₹10,000 per annum on interest earned from savings accounts (excluding interest from fixed deposits). This deduction is available for individuals and Hindu Undivided Families (HUFs).
Interest on Fixed Deposits (FDs): Interest income from FDs is also taxable under income from other sources. However, unlike savings account interest, there is no deduction available for FD interest under Section 80TTA.
TDS on Interest Income: If the interest income exceeds ₹40,000 in a financial year (for individuals below 60 years of age), the bank is required to deduct Tax Deducted at Source (TDS) at 10%. However, if you are eligible for a lower tax rate or no TDS, you can submit Form 15G or 15H to the bank.

It is important to report all interest income, whether it is from a savings account, fixed deposit, or any other source, in your ITR to ensure compliance with tax laws.

Claiming Deductions to Reduce Tax Liability

Taxpayers can reduce their overall taxable income by claiming deductions on interest income. The following deductions are available:

Section 80TTA: As mentioned, individuals and HUFs can claim a deduction of up to ₹10,000 on interest income from savings accounts under Section 80TTA. If you have interest income from multiple savings accounts, the total deduction remains capped at ₹10,000.
Section 80TTB: Senior citizens (aged 60 years and above) can avail of a higher deduction of ₹50,000 under Section 80TTB on interest income from savings accounts, fixed deposits, and recurring deposits.
Tax-Saving Fixed Deposits: If you have invested in tax-saving fixed deposits, you can claim a deduction under Section 80C of the Income Tax Act. However, this will not apply to interest earned, as the interest on such deposits is still taxable.

By utilizing these deductions, you can reduce the total tax liability arising from interest income, ultimately lowering your overall tax burden.

Reporting interest income correctly in your ITR is essential to avoid penalties and interest. Here are the steps to report it accurately:

Gather the Details: Collect the interest certificates from your bank(s) or financial institutions that show the total interest income earned during the financial year. This includes interest from savings accounts, FDs, recurring deposits, and any other sources of interest income.
Report Interest Income in the Correct Section: On the ITR form, report your interest income under the section "Income from Other Sources." If you have earned interest from multiple accounts or sources, combine the amounts and report the total income.
Claim Applicable Deductions: If you are eligible for deductions under Section 80TTA or 80TTB, make sure to claim them in the "Deductions" section of your ITR form.
TDS on Interest: If TDS was deducted on your interest income, ensure that the TDS amount is correctly reflected in the TDS section of the ITR form. You can claim this amount as a credit against your total tax liability.
Submit the Return: After verifying all the details, submit the ITR form. Ensure that all income and deductions are reported accurately to avoid scrutiny from the tax authorities.

Tips to Avoid Scrutiny

Report All Sources of Income: Ensure that you report all interest income, including small amounts from savings accounts, FDs, and recurring deposits, to avoid discrepancies.
Check TDS Deduction: Ensure that TDS deductions are accurately reflected in your form. If there are any mismatches between your TDS certificates and the reported amount, it could raise red flags with the tax department.
Ensure Accurate Reporting: Double-check the reported amount of interest income. Any errors, especially under-reporting, can trigger scrutiny or penalties.
File on Time: Timely filing of your ITR helps avoid penalties, late fees, and increases the chances of your return being processed smoothly. Late filings may result in more detailed reviews by the tax authorities.

Conclusion

Interest income plays a significant role in many taxpayers’ finances, and understanding how to report and calculate it correctly is crucial to avoid tax-related issues. By accurately calculating your interest income, claiming applicable deductions, and reporting it in your ITR, you can ensure compliance with tax regulations. Following these steps and utilizing tax-saving options like Section 80TTA can help you reduce your overall tax liability. It’s always best to consult with a tax expert or use a reliable platform likeTaxBuddy mobile app to ensure your tax filing is done accurately and without any mistakes.

FAQs

Q1: Do I need to report interest income from my savings account in my ITR?

Yes, interest income from savings accounts is considered taxable under the Income Tax Act and must be reported in your Income Tax Return (ITR). Even if your bank does not deduct Tax Deducted at Source (TDS) on the interest, you are still obligated to declare the income in your tax return. Failing to report it can lead to penalties or interest charges by the Income Tax Department. It’s important to keep track of the total interest earned in the financial year to ensure proper reporting.

Q2: How can I reduce the tax on interest income from my savings account?

To reduce the tax on interest income from your savings account, you can claim a deduction under Section 80TTA of the Income Tax Act. This deduction allows you to reduce your taxable income by up to ₹10,000 for interest earned from savings accounts, including interest from banks, post offices, and co-operative banks. If you are a senior citizen, you can avail of a higher deduction of ₹50,000 under Section 80TTB for interest income from savings accounts, fixed deposits, and recurring deposits. These deductions can help reduce the overall tax burden on interest income.

Q3: What is the TDS rate on interest income from a savings account?

TDS on interest income from a savings account is deducted at a rate of 10% if the total interest income exceeds ₹40,000 in a financial year for individuals. However, for senior citizens (aged 60 years or above), the threshold for TDS is ₹50,000. If your interest income is below the threshold, no TDS is deducted. It’s important to note that TDS is not the final tax liability; it is an advance tax payment, and the actual tax payable will depend on your total taxable income.

Q4: Can I claim deductions for interest on fixed deposits?

No, Section 80TTA and Section 80TTB do not apply to interest earned from fixed deposits. While you cannot claim these specific deductions for fixed deposit interest, it is still considered taxable income and must be reported in your ITR. The interest income from fixed deposits is added to your total income and taxed according to your applicable tax slab. However, if you are a senior citizen, you can claim a deduction of up to ₹50,000 under Section 80TTB for interest income from fixed deposits, recurring deposits, and savings accounts.

Q5: What should I do if TDS was deducted but not reflected in my ITR?

If TDS was deducted but not reflected in your ITR, you should first verify the TDS details on your Form 26AS. Form 26AS is a consolidated tax statement that shows the TDS deducted by all deductors (such as banks or employers) and reflects it in the system. If there is a mismatch or omission in the form, you should raise the issue with your deductor (such as your bank or employer) to ensure the correct amount of TDS is reflected in your Form 26AS. After resolving the issue, you can claim the correct TDS credit in your ITR.

Q6: Can I claim deductions for interest income from recurring deposits?

Yes, the interest income from recurring deposits is taxable and must be reported in your ITR. However, similar to fixed deposits, you cannot claim any deductions under Section 80TTA or Section 80TTB for recurring deposit interest income. The interest earned is considered taxable income and is added to your total income. If you are a senior citizen, you may claim a deduction of up to ₹50,000 on the interest income from recurring deposits under Section 80TTB.

Q7: How do I calculate the interest on my savings account?

Interest on savings accounts is typically calculated by applying the bank's interest rate to your account balance. Most banks calculate interest on a quarterly or yearly basis. The interest earned is credited to your account at regular intervals (monthly, quarterly, or yearly). You can check the interest credited to your account by reviewing your bank statements. The total interest earned over the financial year must be reported in your ITR as taxable income. Keep in mind that even if the interest is small, it still needs to be declared to ensure full compliance with tax laws.

Q8: What is the difference between Section 80TTA and Section 80TTB?

Section 80TTA and Section 80TTB both offer deductions for interest income, but they apply differently based on the taxpayer’s age:

Section 80TTA: This section provides a deduction of up to ₹10,000 for interest income earned from savings accounts, including savings accounts at banks, post offices, and co-operative banks.
Section 80TTB: This section applies to senior citizens (aged 60 years and above) and offers a higher deduction of up to ₹50,000 for interest income from savings accounts, fixed deposits, and recurring deposits.

Section 80TTA applies to individuals below 60 years of age, while Section 80TTB provides enhanced benefits for senior citizens.

Q9: Will interest income be taxed at a higher rate if I have multiple accounts?

No, the tax on interest income is calculated based on the total interest earned across all accounts. Having multiple savings accounts will increase your total interest income, but the tax will still be calculated according to your overall income. However, the deduction limit under Section 80TTA remains ₹10,000 for non-senior citizens, so if your total interest income from savings accounts exceeds this amount, only the interest above ₹10,000 will be subject to tax. Senior citizens, on the other hand, can claim up to ₹50,000 under Section 80TTB.

Q10: What happens if I forget to report my interest income in the ITR?

If you fail to report your interest income in your ITR, the Income Tax Department may issue a notice for the omission, leading to penalties or interest charges. Inaccurate or incomplete returns can trigger scrutiny or an audit, which could further delay the processing of your return and refund. To avoid these issues, it’s important to ensure all sources of income, including interest income, are correctly reported. If you realize you missed reporting interest income, you can file a revised return before the end of the assessment year to correct the mistake.

Q11: Can I revise my ITR if I missed reporting interest income?

Yes, if you missed reporting interest income or made other errors in your initial ITR, you can file a revised return under Section 139(5) before the end of the assessment year. A revised return allows you to correct mistakes, add omitted income, and ensure your tax liabilities are accurate. It’s important to file the revised return promptly to avoid penalties or additional interest charges. The revised return can be filed any time before the end of the relevant assessment year.

Q12: How can TaxBuddy help with interest income reporting?

TaxBuddy provides a simple and accurate way to report interest income from savings accounts, fixed deposits, and recurring deposits. The platform helps you track and report all your interest income while ensuring that you claim applicable deductions under Sections 80TTA or 80TTB, depending on your age. TaxBuddy’s AI-driven tools and expert assistance ensure that your ITR is filed correctly, maximizing tax savings and minimizing errors. Whether you're filing on your own or using expert assistance, TaxBuddy makes the process smooth and hassle-free.