In India, a savings account interest rate could range anywhere around 4%. The interest on savings accounts was earlier offered by banks, depending on the minimum balance maintained in the account in a quarter. However, with revised RBI guidelines, banks can now fix higher interest rates on savings accounts. Banks are now free to calculate interest based on the daily account balance and not on the minimum balance maintained. Thus, account owners may earn higher interest amounts per quarter as compared to earlier.
If a savings account generates interest amounts more than Rs. 10,000 in a financial year, the account holder can claim a tax deduction only up to Rs. 10,000. The remaining interest received gets added to an individual’s total income and income tax is charged on the same.
Here, we will discuss Section 80TTA of the Income Tax act to better understand the interest earnings and associated deductions.
What is Section 80TTA?
Section 80TTA was first introduced in 2013 and came into effect from the financial year 2012-13 onwards. This section still continues to hold good. Section 80TTA of the Income Tax Act 1961 provides deduction on the interest earned on a savings accounts maintained with a bank, cooperative society or post office. The maximum deduction that can be claimed in this case is Rs.10,000/-.
The section does not permit any deduction for FD interest earned. Deduction is allowed to all individuals and HUFs except super senior citizens (aged 60 or more).
Who can Claim 80TTA Deduction? Can NRIs Avail of a Deduction under 80TTA?
The taxpayers who can claim deductions under section 80TTA of the Income Tax Act are:
- Individual taxpayers or Hindu Undivided Family (HUF)
- Indian residents
- Non-Resident Indians (NRIs) who have NRO savings accounts
- An entity having savings accounts with institutions like banks, post offices, or cooperative societies
The following list of taxpayers are not eligible for deduction under Section 80TTA. If the interest income is derived from an account held by or on behalf of:
- A firm, or
- An association of persons, or
- A body of individuals
- No deduction is allowed to any partner of the firm or any member of the association or any individual of the body. While calculating the total income, these taxpayers cannot claim a deduction against the interest income.
- Senior citizens also cannot claim deduction u/s 80TTA. They can, however, claim tax benefit u/s 80TTB.
Which type of interest incomes are allowed as deduction under Section 80TTA?
The interest income categories that are allowed as a deduction under Section 80TTA are:
- Interest earned from a savings account maintained with a bank
- Interest earned from a savings account maintained with a co-operative society involved in banking business
- Interest earned from a savings account maintained with a post office
Interest Income Not Allowed as Deduction Under Section 80TTA?
Mentioned below are the interest income categories that cannot be claimed as a deduction under Section 80TTA:
Time deposits are deposits that are repayable upon expiry of fixed periods. Deduction cannot be claimed for –
- Interest from fixed deposits
- Interest from recurring deposits
- Any other time deposits,
Maximum deductions allowed under Section 80TTA
The maximum deduction permitted under Section 80TTA is Rs. 10,000. If an individual’s interest income is below Rs. 10,000, the entire interest income can be claimed as deduction. If the interest income is more than Rs. 10,000, the deduction is limited to Rs. 10,000. It is important to note that one has to consider total interest income from all banks where an individual has accounts.
How to Claim Deduction Under Section 80TTA?
Taxpayers can claim deduction under section 80TTA on total interest income that is taxed under the head ‘Income from Other Sources’. To claim deduction under this section, taxpayers need to first calculate their gross total income under all the income heads for the relevant financial year. The next step is to include for all the applicable deductions under Chapter VI A which includes deduction under section 80TTA. This deduction is not vaailble for taxpayers who opt for taxation as per the new tax regime.
To understand the applicability of deduction available under section 80TTA, let us consider the following example.
Consider Mr. X having a gross salary of Rs. 10,00,000 and eligible investments under section 80C of Rs. 1,50,000. Interest earned from savings account is Rs. 12000 and interest from recurring deposits is Rs. 15000. The taxable income in this case will be calculated as under.
|Particulars||Amount (Rs.)||Amount (Rs.)|
|Income from Salaries|
|(-) Standard Deduction||(50,000)||9,50,000|
|Income from Other Sources|
|Income from savings account||12,000|
|Income from recurring deposits||15,000||27,000|
|Gross Total Income||9,77,000|
|(-) Deduction Under Chapter VIA|
|Net Taxable Income||8,17,000|
While currently Section 80TTA of the Income Tax Act allows deduction of Rs. 10,000 from interest income earned by an individual through a savings account, it is subject to change every year. Changes are announced in the Union budget on a yearly basis.
- Is it mandatory to disclose interest income from a savings bank account?
Yes, it is mandatory for every assessee under the Income Tax Act,1961, to disclose all the income earned in a financial year.
- What happens if I don’t report interest income from a savings bank account balance?
If you do not report the interest income earned from savings account balance either intentionally or otherwise, you could be liable to penal provisions for non-compliance in case of an enquiry. You may also be demanded to pay the tax due along with interest.
- My annual income is below the minimum annual tax slab. Should I still pay tax on the interest earned on my savings bank account?
If your total annual income is below the lowest income tax slab, you don’t need to pay tax on the interest earned on your savings bank account. This, even if it goes beyond Rs.10,000/- since you do not have taxable income.
- Is 80TTA in addition to 80C?
The tax deduction under Section 80TTA is in addition to the deduction of Rs. 1.5 lakhs, under Section 80C.
- What is the due date for filing income tax returns in India?
The due date for filing income tax returns has been extended to September 30, 2021 this year due to the ongoing COVID-19 pandemic. This is in relation to the financial year 2020-21 and assessment year 2021-22.