Income Tax on Savings Account Interest: Taxation & Deductions

“Interest earned from a savings account is taxable under the Income Tax Act. However, individuals and HUFs can claim a deduction of up to ₹10,000 in a financial year under Section 80TTA. If the interest exceeds ₹10,000, the excess is taxed as ‘Income from Other Sources’. For senior citizens (aged 60+), a deduction up to ₹50,000 is available under Section 80TTB.”

Interest earned from a savings account is considered taxable income under the Income Tax Act, 1961. While many assume that savings account interest is entirely tax-free, the reality is that only up to Rs 10,000 is eligible for deduction under Section 80TTA in a financial year for individuals and HUFs. Any cumulative interest income above this threshold must be reported as income from other sources in your income tax return (ITR). Understanding the taxability of interest income, including earnings from fixed deposits, recurring deposits, and post office savings schemes, is crucial to ensure compliance and maximise available tax benefits. This article provides a detailed account of the income tax on interest from savings accounts.

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Taxation Treatment on Interest from Bank Savings Account

Interest earned on your bank savings account is fully taxable and is added to your total income under the head ‘Income from Other Sources’. The amount is then taxed according to your applicable income tax slab rate, which varies based on your total income for the financial year.

For example,

Suppose Mr. Sharma earns ₹15,000 in savings account interest during FY 2025-26. This amount is added to his total income and taxed as per his applicable slab rate:

• If his total income (including ₹15,000) falls in the 5–10 lakh slab: The ₹15,000 is taxed at 20%, resulting in a ₹3,000 tax liability on the interest alone.
• If his total income exceeds ₹10 lakh: The ₹15,000 is taxed at 30%, increasing the liability to ₹4,500.

There are several deductions available to reduce the tax liability. We’ll discuss talk about those tax deductions further in this article.

How is the Income Tax on Savings Account Interest Calculated?

Savings account interest is calculated daily based on the closing balance, as per the Reserve Bank of India (RBI) guidelines. Although the calculation is done on a daily basis, the interest is credited to your account either monthly, quarterly, or biannually, depending on your bank’s policy.

To compute the interest earned on your savings account, you can use the following formula:

Interest per Month = (Daily Closing Balance × Interest Rate × Number of Days) / 365

For example, if your daily closing balance in an ABC Bank savings account is ₹50,000, and the interest rate is 3.5% per annum, then your monthly interest for a 30-day month would be:

(₹50,000 × 3.5% × 30) / 365 = ₹143.84 (approx.)

The interest credited by your bank is treated as income and must be reported under ‘Income from Other Sources’ when filing your Income Tax Return (ITR).

It’s important to note that no TDS (Tax Deducted at Source) is applied by banks on savings account interest, unlike interest on fixed deposits. However, the total interest earned is fully taxable based on your income tax slab rate.

To ease the tax burden, Section 80TTA and 80TTB of the Income Tax Act allow eligible taxpayers to reduce their tax liability. 

Section 80TTA & Section 80TTB - Tax Deductions for Savings Account Interest

Below, we have given a brief explanation on Section 80TTA and Section 80TTB deductions and the differences between them:

Section 80TTA

Section 80TTA of the Income Tax Act provides a deduction of up to ₹10,000 per financial year on interest earned from savings accounts for individuals and Hindu Undivided Families (HUFs) below 60 years of age. This deduction applies to interest income from savings accounts held with banks, co-operative societies engaged in banking, and post offices. The purpose of this section is to encourage savings by reducing the taxable income of ordinary taxpayers. However, it does not cover interest earned on fixed deposits or other term deposits, and senior citizens are not eligible for this deduction.

Section 80TTB

Section 80TTB is designed specifically for senior citizens aged 60 years and above, allowing them a higher deduction of up to ₹50,000 per year on interest income earned not only from savings accounts but also from fixed deposits, recurring deposits, and post office schemes. This broader coverage helps senior taxpayers reduce their tax burden on interest income from various deposit instruments. Unlike Section 80TTA, which is limited to savings account interest, Section 80TTB offers greater relief by including fixed-term deposits, reflecting the different investment patterns of senior citizens.

Here is a table effectively capturing the Section 80TTA & 80TB deductions for savings account interest tax and the differences:

How to Report the Interest Earnings & Claim these Deductions?

Below, we have given the process regarding on how to report the interest earnings and claim these deductions under Section 80TTA and 80TTB:

• Understand the Taxability: Interest from savings bank accounts is taxable under the head ‘Income from Other Sources’.
• Section 80TTA: Individuals and HUFs can claim a deduction of up to ₹10,000.
• Section 80TTB: Senior citizens can claim up to ₹50,000.
• Gather Interest Data: Collect savings account statements from all your banks for the relevant financial year. Add up all credited interest amounts to find the total interest earned.
• Choose the Right ITR Form:
• Use ITR-1 (for salaried individuals with simple tax situations)
• Use ITR-2 (for individuals with multiple income sources or capital gains).
• Report Interest Income:
• Go to the ‘Income from Other Sources’ section of the ITR form.
• Enter the total savings account interest earned.
• Claim Dedication:
• In the ‘Deductions under Chapter VI-A’ section, claim ₹10,000 (or ₹50,000 for senior citizens) under Section 80TTA/80TTB.
• Review and Submit:
• Verify all other income, deductions, and tax payment details.
• Review the form thoroughly and submit the ITR online.

Conclusion

Properly understanding the tax implications of interest earned on savings accounts is essential for ensuring tax compliance and optimizing your deductions. While Sections 80TTA and 80TTB offer valuable relief for individuals and senior citizens, it is crucial to report interest income accurately under ‘Income from Other Sources’ in your ITR. By keeping track of annual interest earnings, selecting the correct ITR form, and claiming the right deductions, taxpayers can reduce their tax burden and avoid penalties, making the ITR filing process smooth and efficient.

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FAQs

1. Is the interest earned on a savings account taxable?

Yes, savings account interest is taxable under the head 'Income from Other Sources' as per the Income Tax Act.

2. How much interest on savings is tax-free?

• Individuals and HUFs: ₹10,000 per year under Section 80TTA.
• Senior Citizens (60+): ₹50,000 per year under Section 80TTB, which includes interest from savings accounts, FDs, and RDs.

3. What is the exemption limit under Section 80TTA?

Individuals and HUFs (below 60 years) can claim a deduction of up to ₹10,000 per financial year on interest from savings accounts.

4. How much interest can a senior citizen claim under Section 80TTB?

Senior citizens can claim a deduction of up to ₹50,000 on interest from savings, fixed deposits, and post office schemes.

5. Do I need to report interest income if it is below ₹10,000?

Yes, you must report all interest income. You can claim a deduction under Section 80TTA or 80TTB if eligible.

6. How is savings account interest taxed?

• Tax Head: Income from Other Sources
• Deductions: Available under Section 80TTA or 80TTB
• Tax Rate: As per your income slab (5% to 30%)

7. Do I have to pay tax on savings account interest?

Yes, if your total interest exceeds ₹10,000 (₹50,000 for seniors). The excess amount is taxed according to your income tax slab.

8. How to calculate income tax on savings bank interest?

• Add all savings account interest earned.
• Deduct ₹10,000 (or ₹50,000 for senior citizens).
• Tax the remaining amount as per your income tax slab.

9. How to avoid tax on savings account interest?

You cannot avoid tax completely, but you can reduce it:

• Claim deductions under Section 80TTA (₹10,000) or 80TTB (₹50,000)
• Ensure total interest stays within these limits.

10. How to save income tax on bank interest?

• Use deductions under 80TTA or 80TTB
• Invest in tax-free options like PPF or tax-free bonds
• Spread deposits across family members to utilize multiple deductions

11. How to save tax on FD interest?

• For senior citizens: Use Section 80TTB for a ₹50,000 deduction
• For others: No direct deduction, but you can invest in tax-free bonds or split FDs among family members.

12. How to save tax on RD interest?

• Seniors: Claim up to ₹50,000 under Section 80TTB (includes RD interest)
• Others: No RD-specific deduction—consider tax-free investments or spreading deposits.

13. How to save tax on interest on savings account?

• Claim the maximum deduction allowed under Section 80TTA or 80TTB
• Keep total interest earned below the threshold deduction limit

14. How much tax do I pay on savings interest?

• If interest ≤ ₹10,000 (₹50,000 for seniors): No tax
• If interest > limit: Tax = (Total interest – Deduction) × applicable slab rate

15. Is savings account interest taxable in the new tax regime?

Yes, it is fully taxable. Deductions under Section 80TTA/80TTB are not allowed under the new tax regime.

DINESH P Expert

Updated on: May 2nd, 2025