In India, you will find almost everyone with a savings bank account. When you have some money in your savings bank account, it keeps earning the interest as well. It means that all savings bank account holders get paid for keeping money in the bank.
However, as you keep earning the interest income on the savings bank account, you need to pay the income tax on it. However, the Income Tax Department (IT) provides an exemption of up to Rs.10,000. It is allowed as per the Section 80TTA of the Income Tax Act, 1961.
In the same context, this article has been created to help anyone get to know how is the interest gets calculated on the savings bank account and beyond. Read on.
How is the interest on savings bank account calculated?
You should know that the bank calculates the savings bank account interest on a daily basis. Before the period April 2010, the interest used to be calculated on the lowest amount in the account. It was done between 10th of every month and last business day of the month.
In April 2010, the Reserve Bank of India (RBI) moved the calculation to a daily basis.
Let’s help you understand the phenomenon by an example:
If on 1st December, Rs.50,000 is credited into your savings bank account. On 5th December, the balance in your account is Rs.35,000 after some withdrawals. You maintained Rs.50,000 for 4 days. If the rate of interest is 4% per year, so how much interest you earned? Here is the simple formula:
Interest = amount or principal in the account x number of days x daily interest rate
Daily interest rate = interest rate per annum/365 days
Thus, at 4% daily interest rate is: 4%/365 = 0.010958%
When is the interest credited into your savings bank account?
Although the interest rate gets computed on a daily basis, it is credited into the savings bank account only at the end of each quarter or half year.
At present, each bank and other lending institutions has its own schedule of crediting the interest. It may include monthly, quarterly and half-yearly payments for the interest rate on the savings bank account.
Example – The HDFC Bank credits their customers with the interests on 31st October and 31st March. The State Bank of India does it on 30th June and 31st December.
Is the interest earned on your savings bank account taxable?
The received interest on your savings bank account is treated as income from other sources. It needs to be declared in your income tax returns. As discussed earlier, there is no provision of TDS deduction from the earned interest on savings account.
For this, the earned interest on your savings bank account should be less than Rs.10,000 in a financial year.
The norm for the calculation of the same was based on your income slabs before 1st April 2012.
Is TDS deducted on the savings bank account interest?
No! There is no provision to cut any TDS on savings bank account interest, irrespective of the received interest. It is because TDS is not deducted, the savings bank account interest does not show up in the Form 26AS.
The Union budget of 2012 led to way for a new section 80TTA in the Income Tax Act which provides the deduction up to Rs.10,000 to an individual and HUF. It is from the Gross Total Income towards the interest on your savings bank account.
Some of the major aspects of the interest on the savings bank account are now revealed. If you don’t know how to calculate tax on your salaried income, you can use an income tax calculator and know all details super quick. The facility is available on the leading finance websites and apps for free.