How Much Interest On Savings Account Is Tax Free?

Under Section 80TTA of the Income Tax Act, individuals below 60 years can claim a tax deduction of up to Rs. 10,000 on interest earned from savings accounts. Senior citizens can claim up to Rs. 50,000 under Section 80TTB. Any interest earned beyond these limits is taxable as per your applicable slab.

Is There A Way To Legally Avoid Paying Tax On Savings Account Interest?

Yes, Indian taxpayers can legally avoid tax on savings account interest by using deductions under Section 80TTA (Rs. 10,000) and Section 80TTB (Rs. 50,000 for seniors). Additionally, distributing funds across accounts and shifting surplus into tax-free instruments like PPF or ELSS can minimise taxable interest while improving overall financial efficiency.

Can I Reinvest My Savings Interest To Avoid Taxes?

Reinvesting savings account interest doesn’t exempt it from taxation. Even if the amount is reinvested, it must be declared as “Income from Other Sources.” However, shifting funds into tax-saving investments like PPF, ELSS, or NPS allows you to claim deductions under Section 80C, thereby reducing your overall taxable income legally.

Tax on Savings Account Interest & How to Avoid It

4 min

08-May-2025

Saving money is second nature for most of us. But what many don’t realise is that the interest earned on savings accounts—though modest—is fully taxable. Whether you're setting aside funds for emergencies or parking surplus salary, the returns you earn can quietly increase your tax liability if you're not paying attention.

Luckily, the Income Tax Act provides several legal ways to minimise or even eliminate this tax burden through smart use of deductions and efficient financial planning.

How is interest from a savings account taxed?

The interest earned from your savings bank account falls under the category of ‘Income from Other Sources’ as per the Income Tax Act, 1961. It is added to your total income and taxed according to your applicable income slab.

However, there’s good news.

Section 80TTA allows a deduction of up to Rs. 10,000 per year on savings interest for individuals below 60 years.
For senior citizens, Section 80TTB increases this limit to Rs. 50,000, and covers not just savings interest but also Fixed Deposits and Recurring Deposits.

If your annual interest exceeds these limits, the excess is taxed as per your slab. Also, if your total annual interest (from FDs + savings) crosses Rs. 50,000 (Rs. 1,00,000 for seniors), banks may start deducting TDS (Tax Deducted at Source).

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Best strategies to avoid tax on savings interest

Here are five smart, legitimate ways to reduce or eliminate taxes on your savings account interest:

1. Utilise Deductions under Section 80TTA or 80TTB

Make full use of the tax benefit you're entitled to:

Up to Rs. 10,000 for regular taxpayers (Section 80TTA)
Up to Rs. 50,000 for senior citizens (Section 80TTB)

Just remember—you’ll need to file your ITR to claim these deductions, even if your total income is below the taxable limit.

2. Distribute Funds Across Multiple Accounts

Spreading your savings across two or more accounts can help you manage your interest earnings better. While the deduction limit remains Rs. 10,000 in total, splitting funds can reduce per-account interest, minimising the chance of TDS being deducted automatically by banks.

However, this strategy works best when paired with good record-keeping.

3. Use Sweep-In Fixed Deposits

Sweep-in FDs are an underrated hack. If your savings account balance crosses a set threshold, the excess gets automatically moved into a Fixed Deposit, earning higher interest.

Though FD interest is taxable, you benefit from:

Higher returns
Flexibility of premature withdrawal
Better liquidity planning

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4. Invest in Tax-Saving Instruments

If you consistently have surplus funds in your savings account, consider shifting them into tax-exempt investment options such as:

These options not only reduce your taxable income but also promote long-term wealth creation.

5. Track Your Interest Earnings Actively

Most people forget to include savings account interest while filing ITRs—or worse, underreport it unintentionally. This can attract notices from the IT Department.

Stay compliant by:

Monitoring your bank statements regularly
Downloading TDS certificates from NetBanking or the TRACES portal
Logging interest income in a simple spreadsheet each year

Being proactive protects you from scrutiny and helps you maximise deductions.

Conclusion

A savings account is a great place to keep your money safe and accessible. But do not let the small interest you earn become a tax headache. With a bit of awareness and a few smart moves—like claiming deductions, diversifying accounts, or shifting funds into higher-return, tax-efficient instruments—you can avoid paying unnecessary tax on your savings interest.

For senior citizens or salaried professionals, these steps can lead to meaningful yearly savings—without compromising liquidity.

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How to avoid tax on savings account interest

How is interest from a savings account taxed?