If you hold a savings account in a post office, then from this fiscal year you will have to pay a tax on the interest income if it exceeds Rs 3,500, according to a recent notification by the Central Board of Direct Taxes. The idea behind bringing the interest income under the tax net is to eventually remove the cap on the limit of deposit in these savings accounts.
The rule so far
Currently you can open a post office savings account with a minimum contribution of Rs 50 and a maximum contribution of Rs 1 lakh if you have a single account. In case of joint accounts, the maximum that you can deposit is Rs 2 lakh. Any interest income on your deposits till now was tax-free. A post office savings account earns 3.5% per annum and the interest is calculated on the balance amount in the account on the 10th of every month. Comparatively, a savings bank account has no limits on deposits, gives 4% per annum that is calculated on the average daily balance. However, the interest income is taxable in this case.
But going ahead, the department of post has recommended that caps be removed on the amount of deposits. It is for this reason that new caps on tax exemption limit have been introduced.
While now an individual will be able to deposit more thanRs 1 lakh, his tax exemption limit will remain the same at Rs 3,500. In case of a joint account it will be Rs 7,000.
So if you deposit more than Rs 1 lakh in a single account interest income, only up to Rs 3,500 will be tax-exempt, the remainder will get added to your income and will be taxed at the applicable rate of income-tax.
What it means
The notification broadly is in the direction of minimizing deductions and exemptions. It also offers a level playing field for savings bank accounts that don’t enjoy any tax exemption. Also, removing the cap will also ensure that an individual does not open multiple accounts in order to enjoy tax benefits.
A post office savings account offers cheque facility. However, one can’t open a group account, institutional account or any other account such as security deposit account or any account in official capacity.