Understand The Importance Of Tax Implications In Financial Planning
Earlier, a lot of people used to keep their hard-earned money at home. Whatever they saved after meeting their financial obligations went to a tangible safe or piggy bank. With the country's emerging banking system, how people save money has changed quite a lot. Today, almost every Indian has a savings account to set aside some money after covering their expenses. Something a lot of people don't know about is how or why they end up paying taxes on their savings accounts. Read on to learn more.
Understanding taxes on savings accounts is important and can impact your finances. You must understand these to avoid mistakes and make informed decisions.
Understanding the tax implications for savings accounts helps reduce your tax liabilities. For instance, you can reclaim income tax on savings account interest by structuring your investments in such a way as to minimise your tax liability and plan savings to benefit from tax-exempted options. Another reason to understand tax implications is to avoid legal trouble. Since tax regulations are complicated, it is easy to make mistakes, resulting in heavy penalties and fines. By understanding the tax rules, you'll know how to avoid tax on savings accounts and save money.
Apart from minimising your tax liabilities and keeping legal trouble at bay, understanding tax implications also helps you make better financial decisions. For instance, depending on your tax situation and liabilities, you can invest in a tax saving fixed deposit to get the associated tax benefits.
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What Are The Tax Implications Of A Savings Account?
According to RBI guidelines, banks calculate interest on the closing balances of savings accounts daily and disburse them to their account holders accounts monthly, quarterly, or half-yearly. Any interest earned on a savings account is taxable - if you are a taxpayer and your income exceeds a certain limit, you must disclose it in your ITR under "income from other sources"
Under Section 80TTA of the IT Act, interest income up to ?10,000 is not taxable. However, if the interest exceeds that amount, it will come under tax deductibles. Since the bank does not deduct TDS on your savings account interest, you must pay it according to the current tax regulations. However, these tax implications are applicable only if you are an individual or Hindu Undivided Family (HUF).
One thing to note is that most banks require you to maintain a minimum balance in the account. Interest rates are low, and the payable saving interest tax can further reduce the amount. Kotak allow you to open a savings account with zero balance with certain terms and conditions.
How To Avoid Tax On Savings Account?
Knowing how to avoid taxes on savings accounts requires much time, energy, and planning. You need to look at your position and make changes if required carefully. For instance, if you have money in your account, it will earn interest according to the bank's policy. The more balance you have, the more interest you will earn. Keeping a considerable balance in your bank account will attract high interest, and if it crosses ?10,000, it will become taxable.
However, tax deduction under Section 80TTA exempts any interest earned on recurring, fixed, and other types of deposits. Moreover, it allows a saving interest tax deduction on an interest amount of up to ?10,000, which means you must pay tax on savings account interest only if the amount exceeds ?10,000. Similarly, Section 80TTB grants special privileges to senior citizens by allowing tax deductions of up to ?50,000 on their earned interest income. Explore more options to save income tax on savings bank interest and maximise savings.
Exploring How Savings Accounts Can Affect Taxes and Financial Obligations
Wondering how a savings account can affect your taxes and financial obligations? Let's look at the saving account tax implications and their consequences:
Taxation Basics: Interest Income
Your interest on a savings account is taxable if it exceeds ?10,000. The higher your bank balance, the higher the interest you earn and the bigger your interest earnings. If they exceed ?10,000, the income tax department considers it your interest income and levies saving interest tax on it.
Taxation on Savings Account Interest
As mentioned earlier, you must pay tax on savings account interest if the earnings exceed ?10,000. However, the taxes on the savings account will be applicable according to your taxable slab rate. To calculate your total tax for your savings account, add interest income from all your savings accounts, including banks, post offices, and cooperative banks.
Tax-Advantaged Savings Accounts
Certain savings accounts help you avoid income tax on savings bank interest. Some tax-advantaged savings account options include the public provident fund, Sukanya Samriddhi Yojana, employees provident fund, voluntary provident fund, etc. These types of accounts offer you tax benefits to save money on saving account tax.
Tax Deductions and Savings Accounts
Although an interest income of over ?10,000 attracts taxes, certain sections of the Income Tax Act allow tax deductions. For instance, Section 80TTA only allows a deduction of up to ?10,000. Moreover, Section 80TTB allows tax deductions of up to ?50,000 for senior citizens.
Tax Considerations for Specific Savings Account Types
Certain savings account types offer better tax benefits than others. For instance, interest earned on a PPF is fully exempt from taxes, including the deposit, interest, and withdrawal amount.
Capital Gains And Savings Accounts
The Indian government offers tax benefits if you reinvest your capital gains within a specific period. The Capital Gains Account Scheme allows you to park your capital gains until you reinvest them. Using this scheme, you can safeguard your capital gains while you look for the right avenue to invest in.
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Impact of Tax on Savings Account Returns
Interest earning is one of the most sought-after benefits of opening a savings account. However, if it becomes taxable, it will reduce the amount of returns and restrict your money from growing. That is why knowing how to avoid tax on savings account interest is important.
Conclusion
Savings accounts always encourage you to save money. You can earn a steady income by keeping a sufficient balance in your bank account. However, find ways to avoid making interest on savings accounts taxable and maximise your savings with great returns.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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