Savings account is formed with the idea to encourage their holders like the salaried or those with steady income to park their surplus funds. Owing to their high liquidity feature and deposit insurance cover from DICGC of up to Rs 5 lakh, many holders, especially the risk averse ones, find such accounts to be a prudent option for parking their surpluses and forming an emergency fund. Few even tend to use such accounts to avail their short term crucial financial goals like vacation abroad, car purchase etc.
However, as savings accounts are usually associated with a low saving account interest rate, depositors should first calculate the average interest income from savings accounts before using them to avail any of their goals. Doing so would help ensure adequate corpus generation for financial goals as per the depositors’ defined time horizon.
Currently, the bank savings account interest rate usually ranges anywhere between 3 % and 6 % p.a. in case of private sector banks, up to 7.00 % p.a. on small finance banks and up to 3.35 % p.a. on public sector banks. Note that higher interest rates on savings accounts are only provided on saving account balances within a specific threshold amount.
Besides these, savings accounts offer other benefits like convenient accessibility to the account at any time, easy withdrawals through ATM, faster transfer of funds using online banking and other fund transfer modes. However, while the account endows one with several facilities, their depositors should also be aware about the crucial tax implications on savings bank accounts. Read on to know about it.
Crucial tax implications on savings bank account
Like any other financial option, interest earned over a particular limit of funds in a savings bank account too is prone to attract tax. Interest income on savings accounts is taxable under ‘income from other sources’ subhead according to the depositors’ income tax slab. However, the government has granted certain deductions on it.
For those with an age of sixty and above, the savings account tax limit is formed differently. Also, TDS is not applicable for the savings bank account deposit according to Section 194A. Following are the details of tax on the savings interest.
- Section 80TTA
As per this section, depositors can claim interest income deduction and lower their tax outgo. According to it, an interest income of up to Rs 10,000 per financial year earned from total deposits across all savings accounts is tax free. To become eligible to claim this benefit as per Section 80TTA, one should be an Indian citizen residing in India.
- Section 80 TTB
This benefit is provided to the senior citizens and pensioners with the aim that they have adequate money in hand. As per Section 80 TTB, senior citizens can claim exclusive tax deduction of up to Rs 50,000 on their interest income earned from the deposits held with the bank, co-operative banks, and post offices. The term deposits here refer to savings account, recurring deposit, and term deposit.
The exceptional features that are available on savings bank accounts, make the instrument a prudent option to park surplus funds. While interest income earned on such accounts attract tax, one can avail deductions as per section 80TTA & 80TTB.