Is Saving Bank Interest Exempted in the New Tax Regime?

Introduction

Savings account is a common term that many of us would have heard of. It is a bank account that has your savings. The savings account is meant for individuals who want to ensure that their money is safe and that they are earning a small interest on it. 

All banks provide savings accounts. Some of them include ICICI Bank, HDFC Bank, Kotak Mahindra Bank, etc. It is not similar to the current accounts, where you have unrestricted transactions. 

Besides, there is no need to pay interest on that amount as well. Those, who have steady employment, may want to make use of a savings account. It is not surprising to note that some individuals have several savings accounts. 

This helps them to have a better interest in the money that is saved in their savings accounts. In this post, we will be reading about the new tax regime savings account interest. How can the new tax regime savings account can help enhance the interest rate in your account?

Explaining the New Tax Regime

The new tax regime was first brought out in the year 2020. It was then tweaked due to unpopularity in 2023. It was done to ensure that the common man makes use of the tax regime. The new tax regime offers a lower tax rate. 

Unfortunately, several deductions that were provided in the old tax regime, have been removed. There are no deductions on the long-term savings. Some of them include HRA, PPF, and even home loans. 

At the same, an individual can get certain deductions under the new tax regime. An individual can get an interest deduction that they have given on a home loan. When the property is given rent, then the interest that has been paid can be deducted from the rent that is got from that property. 

The deduction that has been given on the home loan, for a self-occupied property, can’t be used in the new tax regime. The taxpayer does not stand to receive any deduction. Besides, individuals can gain if they are contributing to the National Pension System (NPS) account. This can be done under section 80CCD(2) of the Income Tax Act. 

There is also an exemption for saving bank interest in new tax rules. Some of them include voluntary retirement exemption, leave encashment and gratuity exemption. The tax implications on saving bank interest for the new income tax regime are as follows:

• Those earning more than Rs. 3 lakhs do not have to pay any tax. If they are earning between Rs. 3 lakhs to Rs. 5 lakhs, then they have to pay 5% tax.
• Individuals earning above Rs. 6 lakhs to Rs. 9 lakhs have to pay a tax of 10%. 
• Individuals earning between Rs. 9 lakhs to Rs. 12 lakhs have to pay a tax of 15%. 
• Taxpayers earning between Rs. 12 lakhs to Rs. 15 lakhs have to pay a tax of 20%. 
• All those earning more than Rs. 15 lakhs, have to pay a tax of 30%. 

Understanding Saving Bank Interest

Eligibility and Documentation to Open a Savings Account

For those who haven’t opened a savings account, or if they plan to open an account in the near future, then they can do so using the following requirements: 

• Firstly, the individual should be from India and have the required documents of proof.
• Though foreigners can apply, they can open certain savings accounts.
• The individual should be above 18 years of age. Those who are below 18 years old can open a kid’s savings account.
• Today, a PAN card is required for all financial transactions.
• The savings account should be linked to the Aadhar card, to be able to receive government subsidy benefits.
• Depending on the kind of account, live video or photographs can be required.
• Documents like ration cards, voter IDs, and driving licenses, can be provided as proof.

When an individual borrows money, then the interest rate is calculated based on the yearly percentage of the loan. It depends on the amount borrowed and the time frame for repaying it. Likewise, savings is when the money is placed safely inside the bank account, that the bank provides interest on. 

This interest can be called the savings interest as well. However, the interest that is getting paid, needs to be declared when the income tax form is filled yearly. Please do remember, the bank can’t deduct TDS from savings bank interest. 

The interest that is gained from the fixed deposits is taxable. But the interest from savings bank accounts can be taxed only to a certain amount. The amount can be shown as income from other sources. 

What is the impact of tax reforms on interest income?

For some individuals, knowing the tax reforms can be very complicated. However, if the tax rates are decreased for some organisations, then it enables them to invest in the economy. This enables the nation’s economy to have a boost. 

However, this can reduce the earnings of the government, putting on hold some of the social welfare development schemes that were planned for the citizens of the country. According to the RBI, the interest of the savings account is based on the regular balance every day. 

Here, the interest is decided based on a quarterly, monthly, and half-yearly basis. The amount that has been credited to the savings account, has to be declared when filing for the ITR on the forms, as the head Income from other sources.

Below is the formula that can be used to calculate interest on a savings account:

Interest per month = Daily closing balance * Rate of interest * Number of days / (Days in a year)

When the daily balance is Rs. 3 lakh, and the interest is 4% per annum, then the interest component is as follows: 

Interest per month = Rs. 3 lakh * .04 * 30 / 365 will be the interest on the savings account.

Changes in Tax Treatment of Saving Bank Interest

Expenses that are allowed to be deducted from some income sources

A taxpayer can claim some deductions on expenses, which have been given below: 

• The expenses that are not under capital expenses can be used. They are insurance premiums, repairs, and depreciation. This can be for the furniture, machinery, and buildings.
• However, the rental income that is received through the machinery can be taxed from other sources. 
• Likewise, there is a deduction on the family pension. If the pension is less than Rs. 15,000, and it is received by a family member due to the death of an employee, then it is non-taxable.

According to Section 57(iii), a deduction can be taken for any other expense that has been spent only for earning this kind of income.

Now, we will read about the dividend income. The dividends that are received from investments, like a stock, have to be mentioned under income from other sources. Recently, the Dividend Distribution Tax (DDT) has been removed. 

So, those who are getting dividends should include them in their total income. However, they can claim an interest expense of 20% on the dividend income. When the total dividend amount is more than Rs. 5,000, then the company can deduct TDS at 10%.

There is something known as agriculture income, which needs to be paid by farmers, and those associated with the agriculture business. 

The agricultural income covers 3 main activities:

• The revenue that is obtained through an agricultural area that is based in India. 
• Likewise, the revenue is through agricultural activities like tilling the land, cultivation of the land, sowing seeds, and so on. 
• Some of the agricultural activities could also include cutting plants, pruning, tending, and harvesting. 
• The revenue that is obtained through farm buildings needed for agricultural work.

This also brings us to the question of how much is savings account interest tax-free. The Hindu Undivided Families (HUFs) & individuals can get a deduction of Rs. 10,000 through their savings account annually.

It is possible through section 80TTA. It means the first Rs. 10,000 interest income will not be taxed. However, additional interest income will be taxed, according to the income tax slab rates. Likewise, there is no limit on how much money can be kept in the savings account. 

But, once the interest exceeds Rs. 10,000 annually, then it is applicable for tax. The best way to calculate the individual’s tax would be to visit an auditor. Besides, they can do it themselves as well. 

First, the total interest earned throughout the financial year needs to be found out. Now, the applicable deductions can be reduced. Then the remaining interest income can be added to the total taxable income.

Lastly, the applicable income tax slab rates can be applied to find out the tax liability. When the individual wants to reduce the tax burden, then they can understand & learn more about tax-saving investment options.

Some of them include the NSC (National Savings Certificate), fixed deposits, and the PPF (Public Provident Fund). Besides, deductions that are applicable under relevant sections like Section 80TTA can be used for HUFs, and so on, to decrease the taxable income.

Government Resources and Documentation

The Section 80TTA changes in tax regime are a very important aspect to know for every taxpayer in the country. So, what is Section 80 TTA and Section 80 TTB? Section 80TTA and Section 80 TTB are vital features that have been offered in the Income Tax Act of India. 

These provide taxpayers relief among certain sections of society. Besides, they can be used for benefiting through the tax implications of interest income. They can be also used on recurring deposits & fixed deposits. 

Section 80TTA benefits Hindu Undivided Families (HUFs). As mentioned earlier, in the post, there is a deduction of Rs. 10,000 annually. It reduces the individual’s taxable income and helps them to reduce their overall tax liability.

The Section 80 TTB is meant for the senior citizens. It helps them gain a substantial deduction of Rs. 50,000 annually. It also includes recurring deposits & fixed deposits. It helps to reduce their tax burden ensuring that they are burdened when they are already retired.

Conclusion

Understanding how interest works on savings accounts can help you make informed decisions about where to put your cash and how to make it work for you. That’s especially important given today’s economy.

FAQs

• Is the interest earned on a savings account taxable?

According to Section 80TTA, the interest amount of Rs, 10000, will not be taxed. However, then the individual is getting more than that, the additional amount will be taxable.

• Does TDS get deducted from a savings account interest?

If it is an individual or a Hindu Undivided Family, then there is no TDS for the interest earned. The money can be taxable to the account holder. This can be done when the money has exceeded a certain limit.

• Are savings bank accounts liable for TDS deduction by banks?

No, the savings account is not liable for the TDS dedication by the bank. However, the interest that is obtained on the fixed deposit will be taxed.

• When an individual earns interest from multiple savings accounts, can they claim deductions on all of them?

It is possible, only under one condition. This is unless the individual has collectively earned only less than Rs. 10,000. When they have earned more than Rs. 10,000, then the additional amount will be taxed.

• Is the dividend received from mutual funds taxable?

The dividend received from mutual funds will come under, “income from other sources.” However, the taxpayer can claim an interest of 20%. 

• What are the benefits of the new tax regime?

The new tax regime is beneficial in several ways. The new tax regime was introduced first in 2020 and then tweaked in 2023. Some of the significant pointers include a simple tax structure, a low-income tax rate, and less paperwork about the investment and declaration.

• What is the interest that gets credited in a savings account?

The interest credited ranges from 2.70% to 7.75% p.a. Most of the private sector banks provide high interest rates, compared to public sector banks. But all the factors need to be taken into account before opening a savings account in a public or a private bank.

• Should the individual link the Aadhaar card with the savings account?

Yes, both the Aadhaar & the PAN card are critical documents that are required for opening a bank account in India. Besides, the account holder can receive yearly government subsidies and DBT benefits. 

• Can an NRI open a savings account?

An NRI can’t open a savings account in India, according to the Foreign Exchange Management Act (FEMA) guidelines. However, they can convert their savings, through a Non-Resident External Account (NRE) account. Then they can open an NRE account.

• What amount of standard deduction are allowed under the new tax regime?

The new tax regime provides individuals with a standard deduction of Rs 50,000. Besides, family pensioners can claim Rs 15,000 yearly. Please note, that the standard deduction was meant for salaried individuals.