Overview
Interest earned on savings bank accounts is considered “Income from Other Sources” under the Income Tax Act, 1961, and is taxable. However, the Indian tax regime offers legal exemptions and deductions that taxpayers can utilize to minimize or eliminate tax liability on such interest.
This article breaks down the taxability, relevant sections, exemptions, and smart financial planning methods to reduce or avoid tax on savings account interest.
Table of Contents
Understand the Taxability of Savings Account Interest
- Interest from savings accounts is not subject to TDS (Tax Deducted at Source).
- It is added to your total income and taxed as per your income tax slab.
- You are liable to pay tax if your total income (including savings interest) exceeds the basic exemption limit.
Section 80TTA – Deduction for Individuals and HUFs
What it offers:
- Deduction of up to ₹10,000 per financial year on interest earned from:
- Savings account in a bank
- Savings account with a post office
- Savings account in a co-operative society
Not applicable to:
- Senior citizens (they get a higher deduction under Section 80TTB)
- Interest from fixed deposits, recurring deposits, or other term deposits
Example:
If you earn ₹12,000 interest from savings account:
- ₹10,000 is deductible under Section 80TTA
- ₹2,000 is taxable as per your slab
Section 80TTB – For Senior Citizens
What it offers:
- Deduction of up to ₹50,000 on interest income from:
- Savings accounts
- Fixed deposits
- Recurring deposits
- Any other interest income from banks, post offices, or co-op banks
Applicable only if:
- You are a resident senior citizen (age 60 or more)
Example:
If a senior citizen earns ₹45,000 from savings and fixed deposits combined, the entire amount is deductible under Section 80TTB — resulting in no tax liability on interest income.
Clubbing and Minor’s Account – Smart Family Planning
You can open separate savings accounts for family members, especially minors or senior citizens, to spread interest income and use deductions effectively.
Note:
- Income earned by minors is clubbed with the parent’s income (usually the one with higher income).
- However, Section 10(32) allows a deduction of ₹1,500 per child per year on such income.
Open Multiple Savings Accounts – With Limits
Having multiple savings accounts in your name (e.g., across banks) doesn’t increase your exemption under Section 80TTA, but it may help you:
- Spread your deposits
- Track interest income more effectively
- Plan your taxable amount and investments smartly
Tip: Keep total interest under ₹10,000 across all accounts to avoid any tax.
Invest Excess in Tax-Free Instruments Instead
To reduce interest accrual in savings accounts, park surplus funds in tax-free investment options like:
| Instrument | Tax Status |
| Public Provident Fund (PPF) | Completely Tax-Free |
| Employees’ Provident Fund | Tax-free (subject to conditions) |
| Tax-Free Bonds (Govt.) | Interest is exempt |
| Sukanya Samriddhi Yojana | Tax-free (for girl child) |
| Equity-Linked Savings Scheme | Tax-saving with growth potential |
This helps reduce interest-earning in savings accounts and puts your money to more tax-efficient use.
Submit Form 15G/15H If Applicable
If your total income is below the taxable limit, submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to banks.
- This prevents banks from deducting TDS (useful for fixed deposits or recurring deposits).
- Although savings account interest doesn’t attract TDS, this is still good financial hygiene for other types of deposits.
Use Joint Accounts Strategically
If you and your spouse open a joint account, interest can be shared proportionally, based on contribution.
- Helps in income splitting
- Beneficial when the spouse is in a lower tax bracket or has unused exemption limits
Caution: The IT Department may require proof of contribution if questioned.
File ITR and Declare Interest Accurately
Even if interest is exempt (via Section 80TTA or 80TTB), it must be reported under “Income from Other Sources” in your Income Tax Return. This ensures:
- Compliance with tax rules
- Avoiding future notices for under-reporting income
- Maintaining transparency in financial records
Summary of Key Strategies
| Strategy | Benefit |
| Claim Section 80TTA or 80TTB | Up to ₹10,000/₹50,000 deduction |
| Use family accounts smartly | Spread and reduce interest load |
| Invest in tax-free instruments | Avoid taxable interest income |
| Keep interest below exemption limits | No tax due |
| File ITR with proper disclosure | Stay compliant |
Final Thoughts
While it’s difficult to completely avoid tax on savings account interest if you have significant funds parked, you can strategically minimize it using the available deductions and smart financial planning. Prioritize investing excess funds in better avenues than keeping large balances in savings accounts, and always stay updated with tax rules to avoid penalties.
