Interest Rate on Savings Account
Earlier, the Interest Rates on Savings Account were fixed by the RBI and was 4% p.a. RBI controlled these Interest Rates, and all banks were required to pay the same interest rates irrespective of the amount of money kept in
the Bank.
But on 25th October 2011, RBI de-regularized this system of fixing the Interest Rates. This de-regularisation meant that all Banks were now free to set the Interest Rates to be paid. This led to different banks paying different interest rates, and this is how it should be in a free economy.
Moreover, RBI stated that Banks could also opt to pay differential interest rates,
i.e., they can pay a different interest rate if the amount is less than
Rs. 1,00,000 and a different interest for an amount over Rs. 1,00,000.
After
this announcement of the de-regularisation of Interest Rates, different
banks have started paying different interest rates. To get more
customers to open saving bank accounts in their banks, banks have also
begun offering a higher interest on savings accounts, ultimately benefiting. From 4% p.a. being paid on Savings
Account before the deregulation, the Interest Rates have increased
considerably, with some banks paying as high as 6-7 % p.a.
Computation of Interest on Savings Account
Another change that has come after this
de-regularisation of Interest Rates is in the computation of
Interest. Earlier, I paid Interest on the minimum balance kept in the
bank account during the month. Thus, if you had Rs, ninety thousand in your bank
account for the whole month and for one day the balance was Rs. 10,000,
you would be paid Interest only on Rs. 10,000 and not on Rs. 90,000 (An
easy example has been taken for understanding).
But
now, this has changed, and the Interest is paid daily on the
end of day balance in the account. This has again benefitted the
customer as they would now be earning more Interest due to
higher interest rates and the change in computation.
Tax on Interest on Savings Account
Interest on Savings Account was earlier taxable as per the Slab Rates. But w.e.f 1st
April 2012, an amendment has been brought in the Income Tax Act and a
deduction of Rs. 10,000 is allowed under Section 80TTA for Interest
earned in a financial year on Deposits from
- Saving Bank Account
- Co-Operative Bank
- Post Office Savings Schemes
The amount earned over and above this Rs. Ten thousand would be liable to tax as per the Income Tax Slab Rates. This deduction under Section 80TTA is only available to Individuals and HUF’s and is over and above the premises provided under Section 80C.
The
taxpayer is requested to note that this is a deduction and not an
exemption. Therefore, it would first be included in the total Income of
an assessee and would then be allowed as a deduction under Chapter VI-A.
Difference between Interest on Savings Account and Fixed Deposit
Under a Fixed Deposit, you must deposit the amount with the Bank for a fixed period, whereas in a
savings account, you can withdraw the amount anytime. As the amount in a
fixed deposit is with the banks for a fixed period, it pays a higher interest than the Interest on the savings account.
However, no deduction is allowed from the Interest earned on Fixed Deposit, and it is taxable as per the Income Tax Slab Rates of the recipient individual. Moreover, TDS @10% is also deducted on the Interest on Fixed Deposit if the Interest earned is more than Rs. 10,000.
On the other hand, a deduction of Rs. 10,000 is given for Interest on Savings Account. Moreover, No TDS is deducted from the Interest on the Savings Account
irrespective of Interest earned. The Income earned from
Interest (whether from Savings Account or Fixed Deposit) is disclosed
under the head – Income from Other Sources.
Even though a deduction of Rs. 10,000 is given on the Interest on Savings Account and not on Fixed Deposits, still Fixed
Deposits are advisable as the Interest paid on Fixed Deposits is
substantially higher than the Interest paid on Savings
Account.
PPF Account is also a good investment option for someone interested in investing in Tax-Free Fixed Income earning Investments.
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