Must Know: Interest income from savings
Interest income up to Rs 10,000 earned from savings bank account or post office savings are exempt from income tax
The fascination for keeping money in the banks took a different meaning with demonetisation when people were forced to park all the high denomination currency notes they had into their post office savings and bank accounts. The move was good in a way, because it allowed people to know how much money they had than stocking money at home. Many of them believed that the interest earned from money in these accounts was a good source of income than letting the money stay in their homes.
Seizing the opportunity, several new banks started to offer a higher interest earned on money in the savings bank account to attract new account holders. The current 4 per cent interest on savings banks and post offices is something mandated by the RBI, and banks paying out 6 per cent or more is mostly on accounts with a higher minimum balance, which is sometimes in excess of Rs 1 lakh.
Taxing the interest
For those unaware—interest earned from saving accounts is considered as income under the head, ‘income from other sources’ and is taxed at the applicable income tax slab that you fall under. There is a silver lining—the entire interest earned this way is not taxed. Under Section 80TTA, interest income of up to Rs 10,000 from savings bank account, post office savings account or a cooperative society engaged in banking business is exempt from tax subject to this limit.
Any interest earned above Rs 10,000 in a financial year will be added to the other taxable income of the taxpayer, and will be taxed accordingly. Do not mistake the exemption limit to be applicable for a single account—it is for the cumulative interest income earned from all such savings accounts that you have. For instance, if you earned Rs 6,000 interest from one savings bank account, Rs 3,000 from another and Rs 2,000 from the post office savings account, you will pay tax on Rs 1,000 as per the income tax slab you fall under.
Ensure that you make note of all the interest you earn from savings accounts before you are filing your tax returns. Do not ignore or fail to report the interest you have earned on savings and disclose the same in your tax returns. This is a good practice as it will help you to understand how much interest income you are earning as well as the tax that you are paying on it. You will also be saved from under reporting interest earned from savings, which many people tend to do; sometimes even inadvertently.
Many a times, people assume that the interest earned in post office savings is not necessarily needed to be added to the interest earned—this is ignorance that you should come out of. Moreover, an oversight by you may be treated as a deliberate suppression of facts and you may need to pay penalty and revise your tax returns to be in sync with the additional income earned from interest. It is in your interest to report the income you earn from interest on savings at the bank and post office for an accurate income reporting and tax filing.