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Finance

The tax implications of earning interest on online savings accounts

Summary: Saving money is the first step towards financial independence and security, and it is also essential to know the tax implications on savings accounts to strengthen your savings, and ensure financial stability, in the long run.

14 Jun 2024 by Team FinFIRST
Tax Implication on Savings Account Interest
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The rising significance of online savings bank accounts stems from their accessibility, convenience, and competitive rate of interest. Such accounts provide easy access to funds, ensuring quick transactions and account monitoring from anywhere at any time. These accounts even come with minimal charges, making them a cost-effective means for banking needs. Setting up as well as managing such accounts is simple owing to their user-friendly interface, which offers the choice of automated savings and helps in tracking finances. Now, have you wondered about the tax implications of earning interest constituents on such accounts?

Firstly, it is important to debunk the misconception that savings bank accounts are completely tax-free. There is no such thing as a tax-free savings account. While it is true that you can get a tax deduction of up to Rs. 10,000 on the overall interest income earned from all your savings bank accounts as per Section 80TTA, this does not make the interest constituent tax-free. Note that the tax deduction is applicable on the overall interest constituent earned throughout all your account variants, not per savings account. Read on to understand how savings account taxes are charged.

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Tax implications on savings bank account
 

When it is about the tax implications of offline or online savings account interest, any interest earned is considered as “income from other sources” and should be disclosed in your income tax return. While interest on a savings account is not subject to TDS (tax deducted at source), any interest earnings surpassing a specified threshold limit (Rs. 10,000 in the case of non-senior citizens and Rs. 50,000 in the case of senior citizens) are taxable at the individual’s applicable tax slab rate.

As per Section 80TTA, individuals below 60 years of age can claim a deduction of up to Rs. 10,000 on interest constituent earned from a savings bank account, co-operative society, or post-office.

Examples of how the tax implication on savings bank accounts work
 

As per Section 80TTA, if you earn an interest constituent of Rs. 15,000 from a savings account, just Rs. 5,000 will be taxable as per your income tax slab after availing the Rs. 10,000 deduction permitted by the provision.

Now let’s understand a scenario where Y, a 68-year-old retiree, earns interest constituent from a savings bank account amounting to Rs. 20,000 and from a fixed deposit equalling Rs. 40,000, resulting in the total interest earnings of Rs. 60,000.

As per Section 80TTB, Y being a senior citizen can claim a tax deduction of up to Rs. 50,000. Despite earning Rs. 60,000 as interest earnings, he can offset Rs. 50,000 from his taxable income. Consequently, just Rs 10,000 of his interest earnings will be subject to taxation. This provision considerably lowers Y’s tax liability and highlights the significance of tax planning for senior citizens, allowing them to make the most out of their interest income, a considerable component of their post-retirement earnings. 

Here’s a quick comparison between Section 80TTA and 80TTB in a tabular format –
 

Particulars

Section 80TTA

Section 80TTB

Applicability

Applicable to individuals below 60 years of age

Applicable to senior citizens

Specified income

Interest on savings account only

Interest on all types of deposits

Quantum of deductions

Up to Rs. 10,000

Up to Rs. 50,000


It is essential that you are aware of the tax implications of earning interest constituent on a savings account to ensure compliance with income tax rules to make a well-informed financial decision. By seeking the highest interest rate on savings and understanding the tax implications, you can effectively grow your savings and enhance your wealth accumulation over time. If you’re seeking a high interest rate on your savings account, consider opting for an IDFC FIRST Bank savings account, which offers one of the highest savings account interest rates in the industry.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.

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