After the government demonetized Rs500 and Rs1,000 currency notes, which formed about were about 86% of the cash in circulation, almost all of those notes, according to a Bloomberg report, have now found their way into bank and post office accounts. Due to the restrictions that have been imposed on cash withdrawals, substantial amounts of this money is likely to stay deposited for some time. While lack of cash is a problem, a silver liming is that the money in various accounts is earning an interest. It is mandatory for banks and post offices to give an interest of at least 4% per annum on savings accounts.
But one must also remember that this interest is liable to tax. Interest earned from saving accounts is considered as income under the head, ‘income from other sources’ and is taxed at the applicable slab rate in the hands of the individual. But all of this interest is not taxable.
From assessment year (AY) 2013-14, a new section—section 80TTA—was introduced in the Income Tax Act, 1961. Under this section, interest income of up to Rs10,000—earned from all the savings bank accounts, either with a bank or banking company or with a cooperative society engaged in banking business, or a post office—is exempt from tax.
The amount above Rs10,000 in a financial year will be added to the other taxable income of the taxpayer, and will attract tax. For instance, if your interest income from various savings accounts (including at a post office) is Rs8,000 this year, then you don’t have to pay any tax on it. But if this total interest income is, say, about Rs15,000, then you need to pay tax on Rs5,000 as per the tax slab applicable to you.
Disclose in Tax Return
Often, while filing tax returns, many individuals either ignore or fail to disclose their interest income. But irrespective of the amount of interest earned during a year, it should be disclosed in the income tax return.
This is a good practice because one should take advantage of the available tax deduction limit specified specially for such income and file the tax returns appropriately. Avoiding or ignoring to disclose savings account interest not only makes the income tax return incorrect, you may end up paying penalty and be required to revise your return if the income tax department traces this income during assessment.