Interest income on deposit is often ignored by tax payers as a source of income. But if you have a sufficient balance to earn upwards of Rupees 10,000 in a year in an ordinary savings bank account then this interest is liable to tax.
Supposing Aditi had a balance of 3.5 lakh in her ICICI Savings bank account at the end of March this year. Also assume that the interest rate is 4% per annum. Had the bank been calculating simple interest at the end of the year based on this balance then by computing 3.5 lakh × (4/100), her interest income would have been exactly Rupees 14,000.
Aditi would then find that her bank would have deducted TDS at a rate of 2.8% per annum on Rupees 4000 by assuming that she falls within the 30% tax slab. Her interest income would then be reduced by Rupees 112.
Of course, banks don’t actually calculate your interest this way because your savings account balance changes from day to day, week to week and month to month. Hence, banks find it best to calculate interest compounded periodically.
As of April 2016, directions from the RBI mandate that banks are to compute interest every quarter instead of every day as this churns up greater benefit to the client. As a rough indication, remember that deposits of over Rupees 2.5 lakh can earn you a taxable interest income. Tax will be levied on the amount that is over 10,000 only.
According to Section 194A(1), the person who pays interest to a beneficiary is responsible for deducting and depositing income tax from the interest amount due to an individual or Hindu Undivided Family.
Section 194A(3) declares that interest income above Rupees 10,000 in a financial year will be taxable at prevalent income tax rates for bank, co-operative society and post office account deposits.
What happens if your interest income exceeds Rupees 10,000 but your total income falls below the taxable limit of income? What if tax has been deducted by your bank at a bracket rate higher than your aggregate income for the relevant assessment year?
Note that these computations can easily become quite complicated and under-reporting of turnover could result in costly penalties and tax notices. In such a situation, it makes sense to hire the services of a competent CA or financial expert. AllindiaITR is one such platform. It is owned and promoted by Corwhite Solutions Private Limited