How is Interest on Savings Account Taxed?

Everyone maintains a savings account for safety, convenience, and liquidity, on which you earn a small percentage of interest. But did you know that the interest on savings account is taxable? 

Understanding how the interest on savings account is taxed helps you plan your finances better. Don’t worry, it’s not as complicated as it sounds. Let’s break down savings account interest taxability for you.

What is Savings Account Interest?

When you keep money in your savings account, the bank gives you a small reward, typically around 2–4% per annum, for parking your funds with them. This reward is called interest. 

For example, you have ₹10,000 in your savings bank account and your interest rate is 3%, then your interest will be ₹300 (₹10,000*3%) for this particular year.

This interest gets added to your account periodically (monthly or quarterly, as per the bank), which is considered as “income” under the Income Tax Act.

How is Interest on Savings Account Taxed?

The interest on your savings bank account is taxable under the head of income from other sources at the slab rate applicable to you. However, you can claim tax deduction under Section 80TTA for interest earned on the savings bank account.

As per Section 80TTA of the Income Tax Act:

• You can claim a deduction of up to ₹10,000 per year on the interest earned from all your savings accounts (across all banks and post offices).
  
• This applies only if you’re below 60 years of age.
  
• If you’re a senior citizen (60+), you get a bigger limit of ₹50,000 for interest income, including interest from savings accounts + FD interest income (total interest income ), but under a different section (Section 80TTB).

Example:
If you earn ₹8,000 as interest in a year, you don’t pay any tax — it’s fully exempt.
If you earn ₹15,000, then ₹10,000 is exempt, and the remaining ₹5,000 is added to your taxable income.

Note: The above tax deduction is only applicable if you opt for the old tax regime; if you opt for the new tax regime, then the above deduction is not applicable.

How is the Remaining Interest Taxed?

The amount above ₹10,000 is added to your total income for the year and is taxed based on your income slab.

For instance:

• If you’re in the 5% tax slab, the extra interest will be taxed at 5%.
  
• If you’re in the 20% slab, then it’s taxed at 20%.

This means the tax isn’t directly deducted by the bank (in most cases), but you need to declare it in your Income Tax Return (ITR) while filing.

Is there any Tax Benefit for Savings Account Interest under the New Tax Regime?

Yes, Interest earned from post office savings accounts offers tax exemption up to ₹3,500 per year for individual accounts and ₹7,000 per year for joint accounts under Section 10(15)(i) of the Income Tax Act. Even under the new tax regime, which limits most deductions, this exemption still applies. This exemption is applicable under both tax regimes.

In the old tax regime, taxpayers must choose between claiming this Section 10 exemption or taking a deduction under Section 80TTA. As you cannot claim both benefits simultaneously, you should choose whichever gives a higher tax advantage.

Do Banks Deduct TDS (Tax Deducted at Source)?

Generally, banks don’t deduct TDS on savings account interest, but they do deduct TDS on fixed deposits (FDs) if interest crosses ₹40,000 in a year (₹50,000 for senior citizens).

Smart Tips to Stay Tax-Savvy

1. Track Interest Across Banks: Use netbanking or bank statements to monitor total interest earned in a year.
2. Include in ITR: Even if no TDS is deducted, include it in your Income Tax Return under ‘Income from Other Sources’.
3. Use Section 80TTA Wisely: Claim the ₹10,000 deduction when filing your return.

Just saving money in the savings bank account will not help you fulfill your life goals, so, along with saving, invest your money & let it grow.

You can check out the Lxme app to learn personal finance, and look out for well-researched and expert-curated mutual fund portfolios.

Knowledge = Empowerment

Knowing how something as basic as savings account interest is taxed helps you stay ahead, avoid surprises during tax season, and make better money decisions.

So next time your phone pings with an interest credit alert, smile and also remember to keep track for tax time! 😉

Also, you can click here and learn finance for beginners  

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Further read:

• What is Endowment Insurance Policy, Its Meaning and Types?
• Tax Evasion vs. Tax Avoidance: What’s the Difference?
• Easy Tips for Salaried Employees to Reduce Their Taxes