Tired of seeing your hard-earned bank interest shrink due to taxes? Learn with us how to save tax on bank interest.
These tax-saving strategies are effective and can help you significantly reduce your tax liability on bank interest.
Conditions of Taxation for Bank Interest in India
In India, interest income from savings accounts, FDs, RDs is taxable under the head “Income from Other Sources”.
Let’s take a look at the types of bank accounts and their interest related tax obligations:
Savings Accounts
- Interest earned up to Rs 10,000 from savings accounts is exempt from tax for individuals and HUFs.
- For senior citizens aged 60 and above, the exemption limit is increased to Rs. 50,000.
- There is no TDS on savings account interest.
Fixed Deposits (FDs) and Recurring Deposits (RDs)
- Interest earned on FDs and RDs is fully taxable as per your income tax slab rates.
- Banks deduct TDS at 10% on FD/RD interest if it exceeds Rs 40,000 in a year (Rs 50,000 for senior citizens).
- TDS is deducted at 20% if the taxpayer does not have a PAN card.
Miscellaneous
- Interest earned on deposits in Non-Resident External (NRE) accounts is tax-free for Non-Resident Indians (NRIs).
- Interest earned from the Senior Citizen Savings Scheme is fully taxable.
How to Save Tax on Bank Interest: 8 Top Options
To save tax on bank interest, (savings accounts and fixed deposits), you can utilize specific provisions under the Income Tax Act in India. Let’s take a look at these and more:
Split Fixed Deposits (FDs):
Instead of investing a lump sum in a single FD, you create FDs that mature at different intervals.
This strategy allows regular access to funds, maximizes interest rates, reduces your tax liability and simplifies tax planning.
Time Your FD Investments
Strategically timing your FD investments, such as starting a 1-year FD in September, allows you to split the interest earned between two financial years.
This approach can help keep the interest accrued each year below the TDS deduction limits, thereby minimizing your tax liability on FD interest.
Tax-Saving Fixed Deposits:
Tax-saving FDs with a lock-in period of 5-years qualify for deductions under Section 80C up to Rs 1.5 lakh.
However, the interest earned is taxable, but the principal amount invested can help reduce your taxable income.
Consult With a Tax Professional
A tax professional can provide personalized strategies to minimize taxes on bank interest income.
Contact professionals like PKC Management Consulting to get help with tax-saving investments, and advise on ways to maximize deductions.
Utilize Form 15G/15H:
If your total income is below the taxable limit, you can submit Form 15G (for individuals under 60) or Form 15H (for senior citizens) to your bank to avoid TDS on interest income.
This form serves as a declaration that your income is below the taxable threshold.
Claim Deductions for Interest Earned on Savings Account:
You can claim a deduction of up to Rs. 10,000 under Section 80TTA of the Income Tax Act.
This deduction applies to interest from savings accounts held in banks, co-operative societies, or post offices.
Remember that this limit is cumulative across all the accounts you hold. So, essentially the total interest earned from all accounts should not exceed Rs. 10,000 to qualify for the deduction.
Utilize Benefits for for Senior Citizens
Senior citizens (aged 60 years and above) can avail a higher deduction limit of Rs 50,000 under Section 80TTB.
This deduction covers interest from savings accounts as well as fixed deposits.
Deductions on Investments
Although not a direct way of saving tax on bank interest, this can help reduce your overall taxable income and thus interest income earned and tax paid.
Investing in tax-saving instruments like ELSS, PPF, NSC, SSY, and NPS allows you to claim deductions under Section 80C and 80CCD.
Frequently Asked Questions
- Can we save tax on bank interest?
Yes, you can save tax on bank interest by claiming deductions for interest up to Rs 10,000 from savings accounts. Senior citizens can claim a higher deduction of up to Rs 50,000.
- Is interest earned on savings accounts fully taxable?
No, interest earned on savings accounts up to Rs. 10,000 is exempt under Section 80TTA.
- How can I save TDS on bank interest?
You can submit Form 15G (for individuals under 60) or Form 15H (for senior citizens) to the bank if your total income falls below the taxable limit. Splitting FDs across accounts can also keep interest income below the TDS threshold.
- How do I avoid tax on FD interest?
Timing and splitting your FD can help you keep it below the taxable limit each year. You can also use tax benefits for senior citizens.
- Should I invest in tax-saving fixed deposits or PPF?
The choice between tax-saving fixed deposits and PPF depends on your investment goals and risk tolerance. PPF offers a higher interest rate and a longer lock-in period, while tax-saving fixed deposits provide more flexibility.
