How to Calculate Income Tax on Savings Bank Interest in India: A Complete Guide
Understanding how savings account interest is taxed is crucial for accurate income tax filing. In India, this interest is taxable but comes with specific deductions that can reduce your tax liability. This guide explains the calculation process, applicable deductions, and how to report this income correctly.
⚖️ What is the Tax on Savings Bank Interest in India?
The interest you earn on your savings bank account is considered taxable income under the head “Income from Other Sources”. However, the Income Tax Act provides deductions under Section 80TTA and Section 80TTB which can make a portion of this interest tax-free.
- No TDS: Banks do not deduct TDS (Tax Deducted at Source) on savings account interest. It is your responsibility to declare the interest earned and pay the corresponding tax while filing your Income Tax Return (ITR).
- Tax Regime: These deductions are available only if you opt for the old tax regime. They are not available under the new tax regime.
🧮 How do you calculate income tax on savings bank interest?
To calculate your tax liability, you need to determine your total interest income and then apply the relevant deduction.
Step 1: Calculate Your Total Savings Interest
First, find out the total interest credited to all your savings accounts (across all banks) during the financial year. You can find this information in your bank statements or from the annual interest certificate provided by your bank. The interest is typically calculated by the bank using the following formula, based on your daily closing balance:
Interest = (Daily Balance × Interest Rate × Number of Days) / 365
Step 2: Apply the Correct Deduction
Based on your age, you can claim a deduction on this interest income.
Step 3: Add the Taxable Interest to Your Total Income
The net taxable interest (after deduction) is added to your total income (like salary, business income, etc.) and is taxed as per your applicable income tax slab rates.
Calculate your exact tax liability on savings interest instantly using our Income Tax Calculator tool.
❓ Is interest from a savings account fully taxable?
No, savings account interest is not fully taxable. You can claim a deduction under Section 80TTA or 80TTB as explained above.
- If your total savings interest across all accounts is ₹10,000 or less (for non-senior citizens), the entire amount is deductible, making your effective tax liability zero.
- Only the amount exceeding the deduction limit (₹10,000 or ₹50,000/₹1,00,000) becomes part of your taxable income.
✍️ Where to show savings interest in ITR form?
When filing your ITR, you must report the income and the deduction in the following manner:
- Declare Gross Interest: Report the total savings interest earned (before any deduction) under the schedule “Income from Other Sources”.
- Claim Deduction: Claim the deduction under the relevant section (80TTA or 80TTB) in the schedule for “Deductions under Chapter VI-A”.
💡 A Practical Calculation Example
Let’s consider an example for Mr. Sharma, aged 35, who has the following income for FY 2024-25:
- Salary Income: ₹5,00,000
- Interest from Savings Account: ₹12,000
- Interest from Fixed Deposit: ₹15,000
Calculation of Taxable Income:
| Particulars | Amount (₹) |
|---|---|
| Income from Salary (after standard deduction) | 4,50,000 |
| Income from Other Sources | |
| Interest from Savings Account | 12,000 |
| Interest from Fixed Deposit | 15,000 |
| Gross Total Income | 4,77,000 |
| Less: Deductions under Chapter VI-A | |
| Deduction u/s 80TTA (on savings interest, up to ₹10,000) | (10,000) |
| Total Taxable Income | 4,67,000 |
Note: The FD interest of ₹15,000 is fully taxable as it is not eligible for deduction under Section 80TTA.
✅ Key Points to Remember and Common Mistakes
- Multiple Accounts: The ₹10,000 limit under 80TTA is a combined limit for all your savings accounts, not per account.
- Eligible Income: Do not confuse savings account interest with fixed deposit (FD) or recurring deposit (RD) interest. Section 80TTA does not cover FD/RD interest. Senior citizens, however, can claim deduction on FD/RD interest under Section 80TTB.
- Documentation: Always keep your bank statements and interest certificates handy for verification and to ensure accurate ITR filing.
- Mandatory Disclosure: You must disclose this interest income even if it is below the taxable limit due to deductions. Non-disclosure can lead to penalties.
This guide covers the essential rules for calculating and reporting tax on savings bank interest. For complex financial situations, it is always advisable to consult with a qualified tax advisor.
Final Words
Understanding the tax implications on your savings bank interest is a key part of financial planning. By accurately calculating your interest income, applying the correct deductions under Section 80TTA or 80TTB, and correctly reporting it in your ITR, you can ensure full compliance with tax laws while optimizing your liability.
Remember to:
- Collect your annual interest certificates from all your banks.
- Choose your tax regime (old vs. new) wisely, as it impacts your eligibility for these deductions.
- Disclose all interest income, even from accounts with minimal activity.
Staying informed helps you avoid common pitfalls and keeps your financial journey smooth and compliant. For complex situations, consulting a qualified tax advisor is always recommended.
FAQs on Income Tax for Savings Bank Interest
1. Is TDS deducted on savings account interest?
No, banks do not deduct TDS (Tax Deducted at Source) on savings account interest. The account holder is responsible for declaring the total interest earned and paying the corresponding tax while filing their Income Tax Return (ITR).
2. Can I claim deduction on fixed deposit (FD) interest under Section 80TTA?
No, Section 80TTA only applies to savings account interest. Interest earned from fixed deposits (FDs) or recurring deposits (RDs) is not eligible for this deduction. However, senior citizens can claim a deduction on FD/RD interest under Section 80TTB.
3. What happens if I have multiple savings accounts?
The deduction limit under Section 80TTA (₹10,000) is a consolidated limit for all your savings accounts across all banks. You must add the interest from all your savings accounts and then claim a deduction on the total, up to the maximum allowable limit.
4. Is the Section 80TTA deduction available under the new tax regime?
No, deductions under Section 80TTA and 80TTB are not available if you opt for the new tax regime. These deductions are only accessible under the old tax regime.
5. Do I need to pay tax if my total income is below the taxable limit?
Even if your total income is below the taxable limit, it is mandatory to disclose your savings interest income in your ITR if your total income exceeds the basic exemption limit before claiming deductions under Chapter VI-A (like 80C, 80D, 80TTA, etc.). Filing an ITR is a good practice to document your income.