Savings Bank Account becomes Tax Efficient: Budget 2012

There is some good news in terms of Interest you earn on Savings bank account. Till now all the interest income earned from your saving bank was taxable. However Budget 2012 proposes that saving bank interest income up to Rs 10,000 will not be taxed under a new section, 80TTA. This benefit would be available to both an individual and Hindu Undivided Family. The deduction is available in respect of interest on savings bank accounts earned by you from a bank or a credit cooperative society or from a post office.

How it impacts you?

To earn an interest income of Rs 10,000, one will have to invest Rs 1,42,857 at 7% interest rate. As the RBI has freed the cap on interest that can be offered on savings account, banks are offering a higher rate, some as high as 7%. Now that this income is tax free, it offers an attractive return comparable to and sometimes even better than a fixed deposit. Normally, a bank would offer around 9% interest on FD. But if one is in the highest tax bracket, the net income from the fixed deposits post tax will be 6.30%. But if a person’s income is in the 20% slab, the net income post tax will be 7.2%. It will be 8.1% in the 10% tax bracket. Therefore, the person in the highest tax bracket will be better off if he keeps his money in a savings account. (This example may not be totally true today but looking at the trends this might be the future)

Other than this small taxpayers with income up to Rs 5 lakh and interest from savings account up to Rs 10,000 would not even be required to file returns.

Also there are a lot of people who did not declare their saving account interest in their taxes and always wondered what would income tax department do in case they are caught. This would bring relief to them  😆

Don’t confuse this with interest earned on your Fixed Deposit, which is still taxable!