How is interest from a savings account taxed?

How is interest from a savings account taxed?

A savings account does more than keep your money safe—it also earns you interest. This interest is the bank’s way of rewarding you for maintaining a deposit, and it’s usually credited to your account quarterly or semi-annually. While the rate may seem modest compared to other investment options, it provides a steady and risk-free return.

For many individuals, especially those seeking liquidity and security, this interest becomes a valuable source of income. However, it’s also taxable, making it essential to understand how it works and its impact on your overall finances.

How Interest from Savings Account Is Calculated

The interest you earn on a savings account is based on your daily closing balance and credited by the bank periodically, usually quarterly. The Reserve Bank of India has mandated that banks calculate interest daily, ensuring fair returns to account holders.

Formula:

Savings Account Interest = (Daily Balance × Rate of Interest × Number of Days) ÷ 365

For example, if your daily balance is ₹50,000 at 3.5% annual interest, the calculation is:

(50,000 × 3.5 × 1) ÷ 365 = ₹4.79 per day.

This approach ensures even small balances are fairly rewarded.

Factors that Influence Interest from Savings Account

Several factors decide how much interest you earn on your savings account:

• Bank policies: Different banks set varying interest rates.
• Account type: Premium or salary accounts may offer better rates.
• Daily balance: Interest is calculated on the closing daily balance.
• RBI guidelines: Central bank rules influence how interest is computed.
• Market conditions: Economic shifts can affect offered rates.

Understanding these factors helps you select the right account for optimal benefits.

Simple vs Compound Interest from Savings Account

Though most banks offer simple interest on savings accounts, it’s useful to understand how compound interest differs.

Savings accounts generally follow the simple model, but compounding comes into play in fixed deposits or recurring deposits.

Typical Interest Rates on Savings Accounts in India (2025)

In 2025, most savings account interest rates in India range between 2.5% and 4% per annum, depending on the bank and the type of account. Some small finance banks and private institutions may offer slightly higher rates, around 5–6%, to attract depositors.

Public sector banks typically operate at the lower end, with rates closer to 3%. These rates are subject to periodic changes based on monetary policy, liquidity needs, and competitive market forces. Comparing rates before opening an account can help maximise your earnings without compromising on safety.

Tax Implications: Interest from Savings Account in India

Interest earned on savings accounts is taxable under the head “Income from Other Sources.” However, Section 80TTA of the Income Tax Act provides a deduction of up to ₹10,000 per financial year for individuals (below 60 years of age) and Hindu Undivided Families (HUFs). Senior citizens benefit from a higher limit of ₹50,000 under Section 80TTB.

It’s important to note that banks do not deduct TDS on savings account interest, but you must report the income while filing your ITR. Accurately declaring this interest ensures compliance and avoids any penalties later.

How to Maximise Interest from Your Savings Account

Earning more from your savings account is possible with smart choices:

• Maintain a higher daily balance to earn a higher interest rate.
• Opt for accounts offering tiered or higher rates.
• Use sweep-in or auto FD facilities for surplus funds.
• Compare banks regularly to pick the best rates.
• Track interest credits quarterly or half-yearly.

Small adjustments can ensure your savings generate steady returns.

Common Mistakes with Interest Calculations

Many account holders lose out on interest due to simple mistakes:

• Assuming interest is calculated monthly instead of daily.
• Ignoring minimum balance requirements.
• Not checking if the interest credited matches expectations.
• Forgetting to declare taxable interest in the ITR.
• Overlooking tiered rate conditions for higher balances.

Avoiding these errors helps you make the most of your savings account.

AN Sep 60/25