Saving Tips, Tax Saving Tips

How to Calculate the Tax on Your Savings Account?

13 December, 2020

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How to Calculate the Tax on Your Savings Account?

While most of us tend to have a savings account – or more than one savings account – very few of us would aware of the interest earn and calculate the taxes payable, there from. Most banks tend to offer a rate of 4% that the amount in our savings account earns, howbeit, this might go as high as 7% under certain schemes offered by some banks. Usually, the interest earned by a savings account holder doesn’t invite taxation, but that is only until a certain limit. When that limit is breached, however, the account holder needs to pay on the excess interest earned.

As explained in Section 80 TTA of the Income Tax Act, a person can save a maximum of 10,000 rupees on their total interest earned from their savings accounts, in a fiscal year. Anything above this would inevitably involve taxes. The exceptions to this Section, however, pertain to certain individuals.

  • When the amount from interests is less than 10,000 rupees, the account holder is exempted from paying income tax irrespective of the tax slab they might fall into. But when the amount earned from interests exceeds beyond the legal limit, the amount that is above the 10,000 rupee mark is liable for taxation and it should separately mentioned under the head “Income from Other Sources” while calculating the gross taxable income.For example, if a person has three savings accounts and he earns an interest of 8,000 rupees 10,000 rupees and 12,000 rupees on each of his accounts respectively in a financial year, the total income from interests is 30,000 rupees. It shouldn’t be assumed that the assessee would have to pay tax only on the interest earned in the third savings account, because it’s more than 10,000 rupees. They will have to pay tax on 20,000 rupees, depending on the tax slab they’re a part of
  • At the same time, account holders can get to save a part of their interest income from being taxed. The interest amounts from all accounts are added together, and if the added interest amount falls short of 10,000 rupees, taxes are not levied on the interest. If the added amount does exceed the mark, the excess amount is subject ot taxation.Under Section 10(15)(i), an assessee can save up to 3,500 rupees on individual accounts and 7,000 rupees in the case of joint accounts, if interests are earned through Post Office savings accounts. Bothe the exemption under Section 10(15)(i) and the deduction under Section 80 TTA can be claimed while calculating the income tax that the account holder has to pay.
  • Banks tend to modify their methods of interest calculation from time to time, in order to provide maximum benefits to the depositors. Earlier, the scheme was that the interest were used to be paid on a monthly basis, and banks calculated interests on the basis of the minimum balance available in the account for the month. For instance, if a person maintained 5 lakh rupees in their account throughout the month, but their balance fell to 1 lakh rupees for a day but again maintained 5 lakhs for the rest of the month, the bank would have provided interest on the basis of 1 lakh being the minimum amount in the account for the month, thereby assuming the role of a principal value.Currently, banks have adopted more or less a realistic approach, whereby the interest to the account holder is given on a daily basis. Interests are given on the amount present in the account at the day’s end. Beneficiaries thus, nowadays, can expect to get higher benefits.

Hence, these are the three ways by which you can calculate tax on your savings account. If you are aware of how much interest the bank charges, and on which amount is the interest calculated on, it’s quite easy to anticipate the amount you’d have to pay as tax, especially if you bear in mind the tax slab you particularly fall into.

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