Do you know how much your savings account gives you? Well, for each bank or institution, the savings account interest could vary, but the truth is that you would be earning interest over it. But were you aware that the interest you earn on your savings account could be taxed?
If you were not aware, you might want to know about it before getting started. It is only right to know the taxes you earn over your investments and savings, and it’s a great way to get started with your savings account.
But before we can get started with that – you might want to know how your savings account earns interest for you.
How Do You Earn Interest on Your Savings Account?
According to our Reserve Bank of India guidelines, interest on savings accounts is calculated daily on the closing balance. Although savings account interest is calculated daily, it is credited to your account monthly, quarterly, or semi-annually.
The following formula is used to compute interest on a savings account:
Monthly interest = Daily closing amount * Interest rate * Days in the month / (Days in a year.)
Before you can get going to the taxes or the 80TTA of Income Tax Act – let’s know more about the savings account.
Have you ever wondered why you need a savings account? It is not just a mere place of the store – it is much more.
What are the Major Perks of a Savings Account?
Let us examine how banks have made savings accounts a deposit that one can never be without by providing fast access to cash at all times.
- Serves a function –The main reason we have a savings account is to keep all of your money safe. A savings account allows you to protect a portion of your regular income from other expenses. It encourages you to save more and also assists you in achieving specific goals such as a wedding, a family vacation, the purchase of a car, and so on.
- Your money is secure – Any savings account issued by a bank or a government organization is always secure. These are strictly controlled, so you may have confidence that your money is in good hands.
- Money is freely accessible – Money can be simply withdrawn from a savings account when needed. Savings accounts can now be accessed online through banks and other institutions. Online money transfers and payments are also possible.
- There is No risk – A savings account has a maximum interest rate, but the main advantage is that there is no risk involved.
- Earn interest – The most important reason why people create a savings account is to earn interest on their funds. Banks compute interest by multiplying the interest rate by the amount of money placed in your account. This interest rate fluctuates from time to time.
- Discounts on lockers – If an account customer maintains a minimum quarterly amount in his account, banks will provide him a 15-30% discount on his locker charge.
- Insurance – When you open a savings account, many banks include insurance coverage, accident treatment fees, and death coverage.
- Discount on gold – If a customer has a significant amount in their savings account, the bank will give them a 2-5% rebate when they buy gold coins from them.
- International Debit Card – A customer who has a debit card for a savings account with a certain bank can convert it into an international debit card in order to conduct transactions outside of the country.
Taxes on the Interest of your Savings Account
- The interest component that is earned on a savings account is categorized as ‘Income from Other Sources.’
- This interest income will be reported on your tax return and taxed at the corresponding slab rate.
- TDS is not owed on savings accounts, according to Section 19A of the Income Tax Act of 1961.
- TDS is deducted at 30% of interest collected on NRO accounts for NRIs.
- TDS is not deducted from NRE accounts.
- Interest generated on savings accounts in excess of Rs 10,000 is taxed at your slab rate.
- Interest on savings accounts up to Rs 10,000 is technically deductible. For example, if your total gross income is Rs 10 lakh and you have a savings account interest of Rs 25,000, your total gross income will be reduced by Rs 10,000.
- This clause allows senior individuals to deduct interest on savings accounts and fixed deposits up to Rs 50,000 per year (those who are above the age of 60).
- The section also allows you to deduct interest on fixed deposits.
- This is an important characteristic that distinguishes the deduction for elderly citizens from the deduction for all individuals.
- The former includes interest on both fixed deposits and savings accounts, whilst the latter exclusively includes interest on savings accounts.
- Deductions are allowed under Section 80 TTA of the Income Tax Act of 1961.
- Individuals and Hindu Undivided Families are the only ones who can deduct, not businesses or enterprises.
- The maximum deduction for interest received on all saving accounts held in post offices, banks, or cooperative banks is Rs 10,000.
- Interest earned from any of these sources above Rs 10,000 is taxed.
What Isn’t Taxed On Your Savings Account?
The interest received on savings accounts is taxed, but you are not required to pay taxes on the entire balance in your account. That money is your savings, and you must have paid income taxes on it before placing it in your account.
This is just a small part; there is still so much more that you might not be aware of about your savings account. The savings account is something that you use on a daily basis, and you might want to know everything you can possibly know about it.
Well, it’s always good to know how much taxes you would be paying over your earnings. This article might have helped you to know so much more about your savings account that you were not aware of.