Savings accounts are the cornerstone of any financial system. While several other savings and investment instruments are available, like fixed deposits and provident funds, regular savings accounts have retained their popularity over the years. From the customer's perspective, savings accounts help you accumulate interest income over time and secure your deposits with a reliable financial institution. The money stored in savings accounts is highly liquid and can cater to your various needs.
Savings accounts play a crucial role in the financial system. They provide the funds that banks and institutions use to give loans. These loans are essential for individuals buying homes, businesses expanding, and investors growing their wealth.
How is interest earned in savings accounts calculated?
As per the guidelines laid down by the RBI (Reserve Bank of India), interest accrued on savings accounts is calculated daily. Each day, the amount of interest accrued is calculated based on the corresponding closing balance of the account. The interest income is calculated and accrued similarly every day, but the payout is made on a specific basis. This could be annually, semi-annually, quarterly, or even monthly.
The formula for calculating the interest on savings accounts is quite simple. It is:
Interest per month=Daily Balance * Rate of interest * Number of days/days in a year
Also read: Fixed deposit interest rates
Tax on savings account interest
Any interest earned on a savings account is considered taxable income. According to the Income Tax Act of 1961, you must report this income in your tax returns, under the category of "Income from Other Sources." While banks do not deduct TDS (Tax Deducted at Source) from savings account interest, it is your responsibility to declare and pay tax on it.
Also read: EPF interest rate
How much is the tax on savings account interest
Under Indian income tax laws, the interest earned from your savings accounts is taxable based on your income bracket. Section 80TTA allows for a deduction of up to Rs. 10,000 annually for individuals or Hindu Undivided Families (HUFs). This means that if your savings interest is less than Rs. 10,000, you might not need to pay any tax on it.
It is important to know that you cannot get around taxes by spreading your savings across multiple bank accounts. The Rs. 10,000 tax deduction applies to the total interest you earn from all your savings accounts combined. For example, if you have multiple accounts and earn Rs. 15,000 in interest throughout the year, you will still need to pay taxes on Rs. 5,000.
Also read: Post office FD interest rate
Conclusion
Paying taxes on savings account interest is a legal requirement. It is important to understand how this works to manage your finances effectively. Your savings account interest is considered taxable income, even though your bank does not automatically deduct taxes. Luckily, Section 80TTA helps you save – you can deduct up to Rs. 10,000 of interest from your total taxable income. However, any interest earned above this amount will be taxed according to your income tax bracket. Knowing these rules helps you to make smart financial choices and stay in compliance with the law.
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