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. However, it’s important to note that tax on Savings Account interest may apply if the interest earned exceeds the exemption limit under Section 80TTA of the Income Tax Act.
The money stored in savings accounts is highly liquid and can cater to your various needs. Savings accounts also play a crucial role in the financial system by providing the funds banks use to issue loans—supporting homebuyers, business expansions, and investments. That said, you should be aware of the applicable tax on Savings Account interest while managing your overall tax liability and investment returns.
Importance of savings accounts
Even with a variety of savings and investment options available today, Savings Accounts continue to play a vital role in personal finance for the following reasons:
1. Safe and Secure
A Savings Account is one of the most secure ways to store your money. Deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC)—a subsidiary of the Reserve Bank of India—up to ₹5 lakh, covering both principal and interest with any RBI-licensed bank.
2. Easy Access to Funds
Savings Accounts offer high liquidity, allowing you to deposit or withdraw money anytime with ease—making them ideal for everyday financial needs.
3. Convenient Money Management
They serve as a primary holding account for your funds and make managing day-to-day transactions simple, from bill payments to fund transfers.
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's important to understand how this works so you can manage your finances more effectively.
The interest earned on your savings account is treated as taxable income. While banks typically don’t deduct TDS on this interest, you are still required to report and pay tax on it.
Fortunately, Section 80TTA of the Income Tax Act offers some relief. You can claim a deduction of up to Rs. 10,000 on interest earned from savings accounts in a financial year.
However, if your total interest exceeds this limit, the excess amount is added to your income and taxed as per your applicable tax slab.
Knowing these rules helps you make informed financial decisions while ensuring you stay compliant with tax laws.
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