POSTED BY September 12, 2013 COMMENTS (116)ON
You can now save tax on an additional Rs 10,000 that you earn from savings bank interest. In the financial bill 2012, A new section called 80TTA was added to the Income Tax Act – 1961. This section allows an income tax deduction of up to Rs 10,000 to an individual or a HUF for interest earned on the savings bank account held with a Bank, Post Office or a Society.
Note that it’s not applicable on Fixed Deposits or Recurring Deposits. It’s only applicable to a normal savings bank account. The section is applicable with effect from April 01, 2013 and will apply from AY 2013-14 onwards.
The best thing I love about this tax deduction is that for tax purposes, investors will no longer have to worry about considering small amounts of interest that they earned on their savings bank account. It was a common occurrence to get a few hundred rupees as interest multiple times a year and it was a real pain to include them while computing taxable income. Almost all investors avoided including them, and thus were officially coming under the scanner as tax avoiders. With this tax deduction, they can now breathe a big sigh of relief.
The answer is YES, in almost all cases, Fixed Deposits (despite being taxable) will give better returns than a normal savings bank account. However, there is a special case where Fixed Deposits are going to only marginally beat a normal savings bank account. It’s for those who come under the 30% tax slab and those whose saving bank interest rate is close to 6% (like Kotak or YES Bank).
I know this is a small percentage of investors, but if they invest some money in Fixed Deposits, the net returns are going to be very close to those of a normal savings bank account. Assuming they want to invest Rs 1 lakh or 1.5 lakhs for a year, returns on a 1 year Fixed Deposit after tax will be very close to interest earned on a savings bank account, because the latter will not be taxable. The table below explains this in more detail
If you are earning 6% from your savings bank account, it takes Rs 1.66 lakhs to get Rs 10,000 interest in a year and if you are earning 4% interest, it will take 2.5 lakhs balance through the year to get the full exemption. However in our experience, we have seen a lot of our clients, as well as other investors, who keep a huge savings bank account balance – as high as 20-30 lakhs in some cases. In that case you will be earning a huge amount of interest on your savings bank account and it will all be taxable. So it is always a good practice to create a Fixed Deposit for the excess amount and only keep about 1-2 lakhs in your savings bank account.
Is your saving bank account interest more than Rs 10,000 in a year ?