Section 80TTA: Deduction for Interest on Saving Accounts

Updated: 5d

Many of us have a habit of parking our savings securely in a savings bank account. Just to secure a spot for our funds. However, did you realize that the interest earned on your savings account is not just a small financial benefit but is also subject to tax? Indeed, interest from savings accounts is taxed under "Income from Other Sources." However, there is a beneficial aspect of interest which is not widely known. Under Section 80TTA of the Income Tax Act, 1961, you can claim a deduction of up to INR 10,000 on interest income, potentially saving a significant portion of earnings from taxes.

Table of Content

What is Section 80TTA?

Who can Claim Deduction under Section 80TTA?

Which Type of Interest Incomes are Allowed as Deduction Under Section 80TTA?

Which Type of Interest Incomes are Not Allowed as Deduction Under Section 80TTA?

Maximum Deduction Allowed Under Section 80TTA

How to Claim Deduction Under Section 80TTA?

Steps to Claim Deduction Under Section 80TTA:

Important Note

Most Asked Questions

This article aims to highlight how interest from savings bank accounts is taxed and, more crucially, how you can take benefit of these tax savings. Whether you are an experienced saver or just a beginner, understanding the details of Section 80TTA can greatly support your financial strategy. Let’s explore the specifics of this lesser-known tax benefit, ensuring you are well-prepared to maximize your savings bank interest.

What is Section 80TTA?

Section 80TTA of the Income Tax Act, 1961, provides tax relief for interest income earned from savings accounts. These accounts can be held with: banks, cooperative societies involved in banking, or post offices within India. This provision allows taxpayers to deduct up to INR 10,000 from their taxable income each year for the interest earned on these accounts. It's important to note, that this deduction does not extend to interest income from fixed deposits, recurring deposits, or other types of time deposits.

Who can Claim Deduction under Section 80TTA?

Deduction under Section 80TTA is specifically available to the following taxpayers:

Individuals and Hindu Undivided Families (HUFs):

The 80TTA deduction is specifically available to individual taxpayers and Hindu Undivided Families (HUFs). This exclusion means that companies, partnerships, and other organizational forms are not eligible for this deduction.

Resident and Non-Resident Indians:

Both resident and non-resident Indians who earn interest from savings accounts can claim this deduction. For non-residents, the deduction applies only to accounts that are permissible under the Foreign Exchange Management Act (FEMA). This ensures that non-residents can only benefit from the deduction through compliant financial channels.

Which Type of Interest Incomes are Allowed as Deduction Under Section 80TTA?

Section 80TTA deduction applies to interest income from the following types of accounts:

Savings Accounts with a Bank: This includes all standard savings accounts held with any public, private, or foreign banks operating in India. Whether your account is with a major national bank or a smaller regional entity, as long as it's a recognized financial institution, the interest you earn qualifies for this deduction.
Savings Accounts with a Co-operative Society: If you have a savings account with a co-operative society that is engaged in banking operations, you can also claim this deduction. It’s essential to ensure that the co-operative society is properly registered and recognized to carry on banking activities to qualify.
Savings Accounts with a Post Office: Interest earned on savings accounts maintained with any of the post offices in India is eligible for this deduction. Post office savings accounts are particularly popular in rural and semi-urban areas and offer benefits similar to those provided by bank savings accounts.

Which Type of Interest Incomes are Not Allowed as Deduction Under Section 80TTA?

Following are the types of interest income that are not eligible for deductions under Section 80TTA of the Income Tax Act:

Interest from Fixed Deposits (FDs): Interest earned from fixed deposits, irrespective of the deposit's term or the institution it is held with, does not qualify for deductions under Section 80TTA.
Interest from Recurring Deposits (RDs): Like fixed deposits, interest from recurring deposits, which are a type of term deposit offered by banks, is also excluded from this deduction.
Time Deposits: This category includes any deposit that is repayable after a fixed period. It encompasses certain types of savings schemes or deposit accounts that mature after a set duration, thus, they are ineligible for Section 80TTA deductions.
Interest Earned on Corporate Bonds and Debentures: These investments involve lending money to a company in exchange for fixed-rate interest payments. The interest received from such investments is not considered for deduction under Section 80TTA.
Interest from Provident Fund Deposits: Interest income from provident fund deposits, which generally offer higher interest rates compared to regular savings accounts, is also not eligible for this deduction.
Interest from Lending Business: Any interest income generated from a lending business, where the main income is through interest received on loans extended to individuals or businesses, does not qualify for this deduction.

Maximum Deduction Allowed Under Section 80TTA

According to Section 80TTA of the Income Tax Act, 1961, there is a limit on the amount of money you can deduct from your interest income earned through a savings account. The maximum deduction limit is INR 10,000 per financial year. Here's how it works:

If your total interest income from savings accounts at any bank, cooperative society, or post office is less than INR 10,000, you can claim the entire amount as a deduction. This will effectively reduce your taxable income by the actual amount of interest earned.

However, if your total interest income exceeds INR 10,000, your deduction will be capped at INR 10,000. This means that regardless of whether you earn INR 10,500 or INR 15,000 as interest, the maximum deduction you can claim will be limited to INR 10,000.

To determine the available deduction under Section 80TTA, interest earned from all the saving accounts should be added.

How to Claim Deduction Under Section 80TTA?

To explain how to claim deduction under Section 80TTA, let’s take an example of Ms. B who has multiple sources of income. She has opted to file her taxes under the old tax regime to file her income tax return.

Steps to Claim Deduction Under Section 80TTA:

Report Interest Income: Ms. B includes the total interest income from savings accounts (INR 5,000) under 'Income from Other Sources' in her income tax return.
Calculate Gross Total Income: Sum up all income sources, which totals INR 470,000 for Ms. B.
Claim Deductions Under Chapter VI-A: Ms. B claims deductions of INR 10,000 under Section 80C for eligible investments/expenses and INR 5,000 under Section 80TTA, the actual interest earned on her savings account.
Compute Taxable Income: After applying the deductions, Ms. B's taxable income is INR 4,55,000.

Important Note:

Tax Regime Selection: Keep in mind that these deductions, that is, Section 80C and Section 80TTA, are applicable under the old tax regime. From F.Y. 2020-2021 onwards, the new tax regime offers lower tax rates but does not allow for these deductions. It is beneficial for taxpayers to calculate tax liability under both regimes to see which is financially advantageous.

FAQ

Q1. What is Section 80TTA of the Income Tax Act, 1961?

Section 80TTA of the Income Tax Act, 1961 allows for deduction of interest earned from the savings bank account by the assessee during the relevant financial year.

Q2. Who can avail a deduction under Section 80TTA?

Deduction under Section 80TTA is allowable to the following types of assessees for interest earned from savings account in India:

Resident Individuals
Non-Resident Individuals having NRO Account in India
Hindu Undivided Family (HUF)

Q3. Who cannot avail a deduction under Section 80TTA?

Deduction under Section 80TTA is not allowable in case: where the income derived from the savings account held by the assessee on behalf of the partnership firm or Association of Persons (AOP) or Body of Individuals (BOI). Thus, a partner or a member of the partnership firm or AOP or BOI respectively maintaining the savings bank account on behalf of such a firm or entity, cannot claim deduction under Section 80TTA.

Q4. Which income is eligible for deduction under Section 80TTA?

Section 80TTA lists the types of interest income that individuals or HUFs can claim. The following are the incomes eligible for deduction under Section 80TTA:

Interest income from savings bank accounts held with the bank or banking institution.
Interest income from savings accounts maintained with the co-operative society engaged in the banking business

Q5. What is the maximum deduction allowed under Section 80TTA?

A maximum deduction of INR 10,000 can be claimed under Section 80TTA. However, if the amount of interest from a savings account is less than INR 10,000, then such an amount will be allowed as a deduction.

Q6. Can a Non-Resident Indian (NRI) claim deduction under Section 80TTA?

Yes. An NRI can claim deduction under Section 80TTA provided a Non-Resident Ordinary (NRO) Account is maintained by him in India.

Q7. Can a deduction under Section 80TTA be claimed under the New Tax Regime?

The New Tax Regime does not allow certain deductions under Chapter VI-A as it was allowed in the Old Tax Regime. The deduction under Section 80TTA is one such type of deduction not allowable under the New Tax Regime.

Q8. Can an interest income from Fixed Deposit be claimed as a deduction under Section 80TTA?

The interest income earned from the fixed deposit cannot be claimed as a deduction under Section 80TTA. Only the interest from savings bank accounts can be claimed as a deduction under Section 80TTA.

Q9. Can a deduction under Section 80TTA be allowed to the partner of a partnership firm maintaining a bank account on behalf of such partnership firm?

An individual being a partner maintaining a savings bank account in the representative capacity of the partnership firm and earning interest thereon is not allowed to claim deduction under Section 80TTA while determining his tax liability.

Q10. Can a deduction under Section 80TTA be allowed to the member of an association of persons (AOP) or body of individuals (BOI) maintaining a bank account on behalf of such AOP or BOI?

An individual being a member of maintaining a savings bank account in the representative capacity of AOP or BOI, and earning interest thereon is not allowed to claim deduction under Section 80TTA while determining his tax liability.