Did You know ? | Post office savings account will now attract tax if interest income exceeds limit

Did You know ? | Post office savings account will now attract tax if interest income exceeds limit

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 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 50 and a maximum contribution of 1 lakh if you have a single account. In case of joint accounts, the maximum that you can deposit is 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.

Going ahead

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 than 1 lakh, his tax exemption limit will remain the same at 3,500. In case of a joint account it will be 7,000.

So if you deposit more than 1 lakh in a single account interest income, only up to 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.