Interest earned from savings accounts at banks and post offices is considered as "Income from Other Sources" and is taxable. However, there are provisions under the Income Tax Act that provide relief to taxpayers on such income.
Section 80TTA of the Income Tax Act, 1961, provides a deduction of up to ₹10,000 on the interest earned from savings accounts. This deduction is available for individual taxpayers and Hindu Undivided Families (HUFs).
If the total interest earned from savings accounts exceeds ₹10,000 in a financial year, the excess amount is taxable as per the individual's applicable tax slab rates. The taxpayer must include this excess interest income under "Income from Other Sources" when filing their income tax return.
Consider an individual who earns ₹15,000 as interest from savings accounts in a financial year. The tax calculation would be as follows:
The taxable interest of ₹5,000 will be added to the individual's total income and taxed according to their income slab rate.
Note: Senior citizens can avail of higher tax benefits on interest income from savings accounts and deposits under Section 80TTB. They can claim a deduction of up to ₹50,000 on interest income earned from savings accounts, fixed deposits, and recurring deposits.