Keeping money in a Savings Account is the fastest way to earn some interest on it. And, many of us wrongly assume that the interest thus earned is tax free. But this is far from the truth. The interest earned on money kept in your Savings Account is taxable.
In this article, we’ll tell you how interest earned on your Savings Account collection will be taxed. The good news is that you can avail deduction of up to Rs. 10,000 on the total Savings Account interest income earned. Keep in mind that the deduction available is not per bank account but on the total interest earned on all your bank accounts.
If your total interest income is below Rs. 10,000 then you do not have to pay tax on it.
Additional Reading: Top 6 Savings Accounts In India In 2016
So, how is the interest income from your Saving Account taxed?
Step 1: Interest from your Savings Account is added to your income from all the other sources and then your total income is taxed according to the relevant tax bracket. Here’s how you can find the interest income when filing taxes for the financial year 2016-2017.
Step 2: Download or get from the bank all your account statements for the previous financial year i.e. for the time period between April 1, 2016 and March 31, 2017.
Step 3: Your statement will show three columns. The first column will mention the merchant name where transactions have taken place. The second will be the deposit column and the third will be the withdrawal column.
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Step 4: The interest accrued to your Savings Account will be shown in the deposit column. Depending on your bank, your statement could show interest as an annual, biannual or quarterly credit(s).
Step 5: Make a note of all the interest credits mentioned in your bank account and add them up.
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Sometimes, when banks deposit interest biannually, you might have interest earned in the previous financial year (2015-2016) being deposited in your account after being clubbed with interest earned in the 2016-2017 financial year. How do you calculate your exact interest earnings then?
Let’s understand this with an example:
Let’s say your bank has deposited Rs. 20,000 as interest in your account on June 30, 2016 for 6 months. To take a fair estimate of the interest earned for the first three months of the financial year 2016-2017 i.e April 1, 2016 to June 30, 2016, you can follow this calculation:
Rs. 20,000 * 3/6 = Rs. 10,000
So, your Savings Account interest for the period between April 1, 2016 and June 30, 2016 will be Rs. 10,000
Let’s assume, you’ve earned Rs. 18,000 for the period between July 1, 2016 and December 31, 2016 and Rs. 15,000 for the period between Jan 1, 2017 and March 31, 2017.
Now your total Savings Account interest is:
Rs. 10,000 + Rs. 18,000 + Rs. 15,000 = Rs. 43,000
If you have more than one bank account then follow the same procedure for them.
In the above case, a deduction of Rs. 10,000 will be applicable on Rs. 43,000 and the remaining amount will be mentioned in the income section during tax calculations.
Tip: Do check your Form 26AS when filing your returns. It has details of all the TDS, TCS and refund associated with your PAN in a given year. In other words, it mentions the amount of tax received by the government from you in the financial year 2016-2017.
Now you know how to add your Savings Account interest for the computation of your income tax returns. It’s good to know that your Savings Account interest is not good enough to beat inflation. How about investing in Mutual Funds, which have a reputation for beating inflation?