Plan your savings bank interest well to avoid tax

Plan your savings bank interest well to avoid tax

Interest on saving bank account has the tax deduction of Rs 10000 per year. This can be used to reduce the tax liability.

One area of taxation that often garners low attention is that of the taxation of the interest on the savings bank account. The benefit here in absolute terms is small but it can have some implications for the financial planning because saving on tax here can be done effectively and it does not require a lot of effort too. This can lead to saving of time and energy for the individual. One needs to carefully look at the position that one is facing so that some changes can be made if required. Here is a detailed look at the entire issue and how this can be handled.

Taxability of income

When there is money present in the savings bank account then this will earn interest. The interest rates on savings bank accounts have been freed so banks can set the rates that they want to. Most of the public sector banks still have a rate of 4 per cent while some private sector banks have higher rates that are offered to their customers. This higher rate comes in two slabs. If the balance in the account crosses a certain threshold which in most cases is around Rs 1 lakh then the highest rate comes into play while balances below this figure earns a slightly lower rate which is still higher than the 4 per cent mark. In terms of taxation of the savings bank interest the income earned is taxable and hence the figure here has to be included in the total taxable income of the individual.

Deduction

There is a deduction that is available for the income that is earned from the savings bank account and this allows for a deduction upto Rs 10,000 in a financial year for an individual. What this means is that income upto Rs 10,000 will be tax free and hence there is no tax to be paid on such an income as the amount would be reduced from the total savings bank interest earned. Let us take a couple of examples to understand the situation. If the total savings bank interest earned in the year is say Rs 5,600 then this entire amount would not be included in the calculation of the taxable income.

On the other hand if the savings bank interest is say Rs 18,700 then Rs 10,000 would be deducted from this and only the remaining Rs 8,700 would be included in the taxable income of the individual.

Full use

One of the mistakes that a lot of people make in the entire process is that they constantly try and earn a higher return by moving funds to fixed deposits but they miss out on this specific benefit. The best way to ensure that the benefit is taken is by putting your money into one of the banks where they are offering a higher rate of interest. This is actually like a fixed deposit rate but still the first Rs 10,000 is not taxable which pushes up the returns on the investment. The amount here is small but for someone in the mid income category it is a benefit that should not be missed. The mixture of the higher rate of return along with the deduction can ensure that there is some amount that has a higher yield and a tax benefit also. For someone in the higher tax bracket the pre tax rate that is covered by this deduction becomes more than the fixed deposit rate. This gives rise to a situation wherein they would have been better off if they had done nothing rather than rush around trying to earn higher returns.

Happy investing

Source:Moneycontrol.com