Interest earned from your savings account is taxable at your slab rate concern slab rate. However, interest up to Rs 10,000 is exempt from tax under Section 80TTA. This tax-exempt limit is Rs 50,000 for senior citizens under Section 80TTB. According to Section 19A of the Income Tax Act, 1961, there is no TDS (Tax deducted at source) is deducted on savings account interest.
For NRIs, tax is deducted at source (TDS) at 30% on interest on Non-resident Ordinary (NRO) accounts. No tax is applicable to interest on Non-resident External (NRE) accounts.
Before knowing how much tax you need to pay for interest earned. Let’s understand how interest is calculated and credited to your savings account.
The below formula is used to calculate interest on a general savings account:
Interest per month = Daily closing balance * Rate of interest * Number of days / (Days in a year)
For instance, if the daily balance is Rs 50000 and the interest offered on the savings account is @ 4 percent per annum, the interest component shall be calculated as follows:
Interest per month = 50000 * .04 * 30 / 365 = INR 164
The interest amount earned on a savings account is accounted under the head ‘Income from Other Sources’. This interest income must be declared in your income tax return and will be taxable as per the applicable slab rate. Interest earned on savings accounts beyond INR 10,000 attracts taxes at your slab rate. Interest on savings account up to Rs 10,000 is technically treated as a deduction. For example, if your gross total income is Rs 6.5 lakh and you earned savings account interest of Rs 25,000 a deduction of Rs 10,000 will be made from your gross total income.