Savings Bank accounts are the most common type of bank accounts held by the people in India. However, interest income on the savings accounts are subject to taxation. These incomes are taxed under the heading: “Income from Other Sources” as per Income Tax Act. In case of substantial income from Savings bank interest, the individual might have to pay the Advance Tax as well.
Advance taxes are payable if the tax liability exceeds ₹10,000 for the financial year and it should be paid in the year the income is received. Since small savings are very common in India and encouraged by the Government, certain tax benefits are given on the interest incomes on saving accounts under the Income Tax Act. The Section 80TTA was introduced in the Finance Bill of 2013 and became applicable from the Financial Year of 2012-13, that is the Assessment Year of 2013-14.
Deduction under Section 80TTA of Income Tax Act, 1961 deals with the taxation of interest earned on savings account. The rules for computing the interest rates has undergone certain changes after the Reserve Bank of India implemented certain de-regulation and guidelines in this respect.
In India, the rate of interest was 4% initially and in 1992, it was close to 6%. From 2003 to 2011, the savings bank account earned an interest of 3.5% until Reserve Bank of India implemented the De-regulation of interest rates in Savings accounts on 25th October, 2011. After the deregulation by Reserve Bank of India, banks are free to fix their interest rates to pay their customers’ on saving account deposits. RBI also allowed the banks to pay differential interest rate, that is, if the deposit amount is less than one lakh the rate of interest could be different than the interest rates given in cases where the deposit is more than one lakh rupees.
Also banks became more competitive in allowing better interest rates to their customers in an effort to attract more customers. Quite a few banks offered interest rates of 6 to 7%, which is more than previous interest rate of 4%, that used to be offered before this de-regulation and which was fixed by The Reserve Bank.
The salient features of Section 80TTA includes:
The Tax exemption from interest income in savings account is limited up to ₹10,000 per annum
This deduction is for the savings accounts held by individuals and Hindu Undivided Family (HUF)
A person can have multiple savings accounts with different banks. But the cumulative interest income from all those accounts together should be under ₹10,000 to get a complete exemption
In case, the total cumulative interest earning exceeds 10,000 from savings accounts, then tax exemption could be claimed for ₹10,000 only. The additional income in this respect will be subject to income tax deduction based on the income slab that the person comes under
The tax deduction under Section 80TTA is over and above the deduction of ₹ 1.5 lakhs, which is deducted under Sec 80C
No Tax Deduction at Source (TDS) for savings accounts held by individuals and HUFs
In Case the Gross Total income of an individual is below the minimum taxable income level, then 80TTA will not come into picture even though the interest income from savings bank accounts exceeds 10,000. For example, if the income for an individual for a financial year is ₹200,000 then he is exempted from paying any income tax. Now, if out of that ₹200,000 income, interest income totals ₹50,000, still it is not taxable because the entire income is beyond the scope of tax liability and the scope of applying Section 80TTA is not attained. In such cases, the individual does not need to file any tax return.
The savings accounts that are covered under Section 80TTA are of the financial Institutions like:
Banks – These are the banking companies that are formed as per the Banking Regulation Act of 1949. These include all banks and banking institutions that are referred to in the Section 51 of that particular Act
Post Offices – These are the Government financial institutes as demarcated in clause (k) of the Section 2 in the Indian Post Office Act, 1898 (6 of 1898)
- Cooperative Societies – These are associations of people which are autonomous in nature and involved in carrying out business similar to banking within a community driven by common economic, social and cultural goals like a Co-operative Land Development Bank
The de-regulation by Reserve Bank also brought some changes in the way interest calculation should be done. Let’s have an illustrative example to explain it better. Previously, the interest was paid based on the smallest balance that was kept in the account for a month. For example, if in a particular month the highest balance was ₹50,000 on 5th of the month and on 28th of the month the balance was ₹8000, earlier, the interest would have been paid on ₹8000 and not on ₹50,000. But this computation has changed and at present interest is calculated on a daily basis based on the closing balance for the day.
This is benefiting for the customers since they will get more interest paid on their accounts apart from the benefit of higher interest rates that the banks give for these savings accounts.
Even though the calculation of interest is done on a daily basis, the interest income gets credited to the savings accounts at the end of each quarters or at the end of half year, based on the protocol of the particular bank. Each bank has its own schedule to pay out interest income on savings banks in monthly, quarterly or half yearly basis.
Being said that 80TTA is applicable for the savings accounts of individuals and HUFs, certain other accounts are also excluded from the scope of this section. If the savings account is held by members or partners of any firm, or by Association of People (AOP) and Body of Individuals (BOI) for a common purpose of earning an income, in those cases income from savings account is not under the scope of Section 80TTA even though the account is held in the name of individuals.
There are other type of Bank accounts for which interest income is not tax deductible under this section. Section 80TTA does not apply for any ‘Time Deposits’ that is the deposits which are repayable after a fixed period of time and are withdrawn after the term of the deposits are expired. Term deposits and fixed deposits are examples of such Time deposits. No tax deduction happens for recurring deposits as well under Section 80TTA.
Savings accounts are meant to park the additional money left after all the requirements are taken care of. This, generally, is not very high amount. The rate of interest earned by these accounts are less compared to the fixed deposits. Generally individuals, HUFs and small scale business persons and firms maintain Savings accounts in banks and other financial institutions. Savings accounts are continuous in nature and withdrawal and deposits could be made anytime. Withdrawal is subject to the maximum allowable limit (as per regulation), though it is quite flexible and the minimum maintenance balance is less. No restriction on deposit amount and frequency. A pass book, check book and debit card could be issued against savings account. However, no loan could be taken against the savings account.
On the other hand, Time deposit accounts like fixed deposit accounts are created to put a good sum of money for a fixed period of time. These accounts will be earning higher rate of interests and gives a lump sum return at the tenure with the accrued interest. The rate of interest on fixed deposits depend on the tenure selected to ‘Fix’ the money. The rates are determined by the individual banks. Deposit and withdrawals are not possible in fixed deposit accounts once those are created, until the fix period is expired. Once the tenure is attained, the money could be withdrawn or reinvested and renewed. A deposit receipt is issued by the banks when a fixed deposit is created. A loan up to the extent of 75% of the fixed deposit amount could be available to the holders of the accounts.
Though interest earnings on saving deposits get tax deduction up to ₹10,000, earnings on fixed deposits are subject to tax deduction. The percentage of tax depends on the income tax slab that the individual is in.
In most of the cases the income from fixed deposits outperforms the income from savings account even though the taxes will be deducted on fixed deposits. In case the margin of interest rates between savings account and fixed deposit is not that high and the depositor falls under 30% tax bracket, there is not much difference in net interest earnings from these accounts.
The responsibility of the account holder is to evaluate his/ her income from interests and to pay tax accordingly. Interest income from the savings bank accounts are considered under the head “income from other sources”. One can either declare or disclose the interest that is earned from multiple savings accounts that the person has to his/her employer and ask the employer to deduct the Tax at source (TDS) on the income, or the person can pay the taxes on his own while filing the return. In case the tax amount is substantial, they may need to pay advance tax on it. One should evaluate the tax liability on the interest income before the advance tax due dates so that payments could be made accordingly. The dates for instalment payments for Advance tax and the percentage payable for taxable income are: 15 September (30%), 15 December (30%) and 15 March (for the residual amount). There is no need to attach an interest certificate at the time of filing income tax returns.
However, the original certificate should be retained to produce in front of the assessing officer in case a tax scrutiny takes place.
Generally, while filing Income Tax Returns, tax payers do not disclose or evaluate the interests earned from savings accounts or the amount of tax due on those.However, it is advisable to disclose it so that people can take advantage of the tax deduction available for such incomes specifically and file a return in a proper manner. This will give the benefit of tax saving as well as avoid any possibility of penalty for non-disclosure or non-filing of those interest earnings. If the earnings or returns are scrutinized, a revising filing might be needed with some penalty for non-compliance.
For an interest rate of 6% in the savings account, if 1.66 lakh rupees is kept in the account, that will earn an interest of ₹10,000. So any amount kept beyond that will attract tax. If the amount maintained in savings account is very high, e.g., 20-30 lakhs, it will create a huge tax implication for the account holder and will offset the benefits of interest income. Beyond a limit of deposit, it is advisable not to keep huge amount in savings account since those have their negative points like withdrawal limits, minimum balance requirements, low returns and most of all missed investment opportunities.
Finally, Section 80TTA gives relief to the investors since they do not have to keep track of small amounts of interests that get accrued in their savings accounts and do not need to include those for computing taxable income. This tax deduction is a breather for them to avoid any penalty of non-payment of taxes on some petty incomes. On the other hand, people having lower to middle income and who have to pay some marginal amount of tax will get the additional benefit of ₹10,000 beyond the tax deduction of ₹ 1.5 lakhs under Section 80C. This is an additional welcoming benefit for them.