Income Tax Relations with Interest Earned Through Savings Bank Account

It is common for individuals to park their funds into an account, which will help them in emergency times. The reason individuals put money in the bank because their money remains safe, and they also get paid for keeping money in the account.

Income Tax Relations with Interest Earned Through Savings Bank Account 47

A savings account is the most popular account opened by individuals. The account usually carries enough funds to cover regular monthly expenses, and the additional amount is the saving for the month. While the funds in the account give you financial relief, it is important to understand the money’s tax implications.

The interest on the savings bank account is calculated daily. This means the deposits and withdrawals will be taken into consideration when calculating the interest. However, the date of credit of interest varies from bank to bank. Certain banks credit monthly, some do quarterly, and some do half-yearly. Individuals earn interest on the idle amount, and the RBI determines the rate of interest. This rate stands at 4% on average, although some banks offer as high as 5% to 6% on their savings accounts.

The Income Tax department provides a tax deduction of up to INR 10,000 under Section 80TTA of the Income Tax Act, 1961. The deduction of interest is allowed only on deposits from the savings bank account, co-operative banks, and post office saving schemes. Also, this deduction is available only to individuals and Hindu Undivided Families (HUF). It is not provided to a firm or an association of persons.

This amount is deductible from the interest earned from all the savings accounts. For instance, if an investor earns interest amounting to INR 50,000 from three accounts, an amount of INR 10,000 will be deductible, and the balance INR 40,000 will be taxable as per the income tax slab he/she falls in. There will be no tax deducted at source (TDS) on the amount of interest.

To claim the deduction, it is important to file an income tax return (ITR). This is because it is a deduction and not an exemption. Hence, the interest amount will first be included in the ITR under the head Income from Other Sources and then deducted. The good news is that the deduction is in addition to the deductions provided under section 80C.


Usually, the first bank account opened by individuals is a savings account. Individuals prefer parking their money into the account instead of a fixed deposit due to the liquidity factor. Also, interest in FDs attracts TDS and is not eligible for any deductions.

John R. Wright
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