If you have filed at least one income tax returns, you already know that there are countless sections in our Indian Tax Regulations and there are many that we dont even know about. The Government and the Tax Department have recently made amendments to Section 80TTA that would be greatly beneficial to Individuals across the country, especially those that are used to keeping substantial sums of money in their Savings Accounts at the Bank.
The idea behind this article is to elaborate on these amendments and throw light on the same.
So, What is this Section 80TTA?
Section 80TTA was added recently to the Indian Income Tax Regulations which will kick-in starting this financial year Apr 2013 to Mar 2014. According to Section 80TTA, up to Rs. 10,000/- is exempt from Income Tax if the income is the interest earned from Savings Bank Account. This 10,000 rupees exemption is over and above all other deductions like the 1 lakh exemption under Section 80C and so on.
This exemption is available to both Individuals and HUF's (Hindu Undivided Families) and the interest could be earned on any savings account held with a Bank or a Post Office or even a Society.
Limitations of Section 80 TTA
1. The Interest earned from Fixed Deposits or Recurring Deposits is not included under this Section 80TTA
2. The Interest earned must be from a regular/normal Savings Bank Account
3. The Section is applicable only starting 1st April 2013
4. The Upper Limit on the Exemption is Rs. 10,000. If the Interest earned in a financial year is above Rs. 10,000/- the Remaining amount is fully taxable
5. The Combined Interest earned from all your Savings Accounts must be taken into consideration for this 10,000 rupee limit.
For Ex: If you earn Rs. 6,000/- from your ICICI Account, Rs. 7,000/- from your HDFC Account and Rs. 4,000/- from your SBI Account, you can deduct Rs. 10,000/- from the total interest earned and still pay tax on the remaining amount of Rs. 7,000/-
Is this a good news?
Absolutely, YES. It makes things a lot easier. Most of us do not have hefty bank balances but still a few hundred rupees of interest will be credited into your account by your bank ever year. According to the existing tax regulations (Up until the last financial year) all these interest amounts must be included into your Taxable Income. Most of us did not know about this rule and would make the mistake of not including it. I wrote an article last year in Feb titled "Some Common Tax Filing Mistakes where not including Bank Account Interest was one of the mistakes.
Going forward, not including it would not be a mistake because, since you have an exemption of up to Rs. 10,000/- you will no longer be an Innocent Tax Evader
If I were to fully utilize this 10,000 rupee exemption limit, how much can I Keep in my Savings Account?
The amount actually depends on which bank you have an account with and how much interest they offer you. Most banks offer interest at the mandatory minimum of 4% in which case you can keep up to Rs. 2.5 lakhs. Some private Banks like Kotak or YES Bank offer much higher interest rates. So, assuming your interest rate is 5% you can keep up to 2 lakhs and if your interest is 6% you can keep up to 1.66 lakhs.
Comparison Between FD's and Savings Account Interest Income:
Lets say you have 1 lakh in a FD that earns 9% Interest per annum, you will get 9,000 as interest and if you fall into the 30% tax slab, your effective Interest income is only 6000 which works out to only 6%. Alternately if you put this money in a savings account that actually offers you 6% you will still get the same 6,000 rupees as Interest Income and pay no tax on the same because the amount is still under the 10,000 rupee exemption limit under Section 80TTA.
Impact of this Rule:
Remember the article titled Awesome News for Savings Account Holders that was written in 2011 wherein we talked about a ruling from RBI that allowed banks to set their own Interest Rates for Savings Account with a minimum of 4%? So, this new ruling will add extra motivation for individuals to keep money in their savings account which would give banks additional motivation to hike interest rates on savings accounts to woo new customers.
Some Final Words:
This rule would come as a great relief to every individual who earns a few hundred rupees as interest from his/her bank account. Because of this rule tax exemption thing, moving small amounts of money (upto 1 lakh) into a FD actually has very little incentive because, the interest earned from your FD is fully taxable and if you deduct the Tax the actual interest earned will workout approximately to be the same as what you would get from your Savings Account. On top of this, banks will be competing with one another to offer the best interest rates on Savings Accounts for customers.
All in all, this is a WIN-WIN situation for us as...