Tax on interest earned on funds in a savings account is calculated based on the individual’s income tax slab. The interest earned on savings accounts is considered “income from other sources” and is added to the individual’s total income for the financial year. The tax on this income is then calculated based on the applicable income tax slab.
Tax on interest earned on funds in savings account
If the interest earned is up to Rs 10,000, it can be claimed as a tax deduction under Section 80TTA of the IT Act. However, if the interest earned exceeds Rs 10,000, it is considered taxable and is subject to the applicable slab rates.
To calculate the tax-free limit, all saving interest income from all accounts, including bank savings accounts, post office savings accounts, and cooperative bank savings accounts must be added up. Additionally, senior citizens (above 60 years of age) can claim a tax deduction of up to Rs 50,000 on interest earned from fixed deposits and savings accounts under Section 80TTB.
The tax slab for the financial year 2021-2022 for individuals below 60 years of age is as follows:
- Up to Rs 2.5 Lakhs: NIL
- Rs 2.5 Lakhs to Rs 5 Lakhs: 5%
- Rs 5 Lakhs to Rs 7.5 Lakhs: 10%
- Rs 7.5 Lakhs to Rs 10 Lakhs: 15%
- Rs 10 Lakhs to Rs 12.5 Lakhs: 20%
- Rs 12.5 Lakhs to Rs 15 Lakhs: 25%
- Above Rs 15 Lakhs: 30%
For senior citizens (above 60 years of age but below 80 years of age) the tax slab is:
- Up to Rs 3 Lakhs: NIL
- Rs 3 Lakhs to Rs 5 Lakhs: 5%
- Rs 5 Lakhs to Rs 10 Lakhs: 20%
- Above Rs 10 Lakhs: 30%
For very senior citizens (above 80 years of age) the tax slab is:
- Up to Rs 5 Lakhs: NIL
- Above Rs 5 Lakhs: 20%
TDS on interest income on savings account
It’s important to note that, Banks are required to deduct TDS (Tax Deducted at Source) on interest earned on savings accounts if the interest earned exceeds Rs 10,000 per financial year. TDS is deducted at the rate of 10% and the individual can claim credit for the TDS while filing their income tax returns.
Additionally, it is important to note that, the interest earned on savings account is taxable in the year in which it is credited to the account, regardless of whether it is withdrawn or not.
For example, if an individual has a savings account with an interest rate of 4% per annum and has a balance of Rs 1 Lakh in the account throughout the financial year, the interest earned would be Rs 4,000. If the individual’s tax slab is 20%, the tax on the interest earned would be Rs 800.
It’s also important to note that, the interest earned on deposits in a savings account is added to an individual’s taxable income and is taxed based on the individual’s tax slab. However, there are certain exemptions and deductions available to individuals that can help lower the overall tax liability.