Tax on Interest on Saving Bank Account

INTEREST ON SAVING BANK ACCOUNT

Earlier the interest on saving bank account were fixed by the RBI and was 4% p.a. These interest rate were controlled by RBI and all banks were required to pay the same interest rate irrespective of the amount of money kept in the bank.

But on 25th October'11 RBI regularized the system of fixing the interest rates. This de-regularization meant that all banks were now free to fix the interest rates to be paid.This lead to different banks paid different rates and this is how this should be in a free economy.

Moreover, RBI stated that Banks can also opt for the option of paying differential interest rates, i.e. it can pay differential interest rates if the amount is less than Rs.100,000.00 and a different interest for amount over Rs.100,000.00

After this announcement of de-regularization of interest rates, different banks have started paying different interest rates. To attract more customers to open saving bank account in their banks, banks have also started paying high interest on saving bank account which has ultimately benefit to customer. From 4% p.a. being paid on saving bank account prior to the de-regularization, the interest rates have shot up considerably with some banks paying as high as 6-7% p.a.

COMPUTATION OF INTEREST ON SAVING BANK ACCOUNT

Another change which has come after this de-regularization of interest rates is in the manner of computation of interest. Earlier interest was paid on the minimum balance kept in the bank during the month. Thus, if you have Rs.90,000.00 in your bank account for the whole month and for 1 day balance is Rs.10,000.00, you would be paid interest only on Rs.10,000.00 and not on Rs.90,000.00.

But now this has changed and the interest is paid on a daily basis on the end of day balance in the account. This has again benefited the customer as they would now be earning more interest not only due to higher interest rates but also due to change in the manner of computation.

TAX ON INTEREST ON SAVING ACCOUNT

The interest earned on saving bank account was earlier taxable as per the slab rates. But w.e.t 1st April'12 an amendment has been brought in the Income Tax Act and a deduction of Rs.10,000.00 is allowed under section 80TTA for interest earned from :

1. SAVING BANK ACCOUNT
2. CO-OPERATIVE BANKS
3. POST OFFICE SAVING SCHEMES

The amount earned over and above this Rs.10,000.00 would be liable to tax as per the Income Tax Slab Rates.
This exemption is only available to individuals and HUF's and is over and above the deduction provided under section 80C.