Claiming Deduction on Interest under Section 80TTA of Income Tax Act

Section 80TTA of the Income Tax Act allows for a deduction on the interest income. However, there are some limitations and restrictions to the deduction. This article has covered everything you need to know about claiming a tax deduction for interest earned.

What is Section 80TTA of the Income Tax Act?

The Income Tax Act of India specifies several deductions that taxpayers may claim to minimize their income tax liability. Income-based deductions, investment-based deductions, profit-linked deductions, and payment-based deductions are examples of such deductions.

Section 80TTA of the Income Tax Act allows a deduction for interest earned on savings bank accounts up to INR 10,000 per year. This INR 10,000 restriction applies to all savings accounts with banks, cooperative banks, and post offices. If the interest earned from these sources exceeds INR 10,000, the excess is taxable under the heading 'income from other sources.'

It is important to remember that the deduction under Section 80TTA is available on the total interest generated on all of your bank accounts, not per bank account.

Senior citizens are not covered by Section 80TTA of Income Tax. However, they get a higher tax break under a different clause. Section 80TTB allows a senior citizen to deduct interest earned on saving deposits and fixed deposits with banks, post offices, or co-operative banks up to INR 50,000. Furthermore, up to INR 50,000, there will be no tax deducted at the source. However, this 50,000 limit must be calculated independently for each bank.

Bank Interest Rates

In India, the initial interest rate on savings accounts was 4%, but by 1992, it had risen to nearly 6%. From 2003 to 2011, the savings bank account earned 3.5 % interest till the Reserve Bank of India implemented the deregulation of Savings Account Interest Rates on October 25, 2011. Following the Reserve Bank of India's deregulation, banks can set their interest rates on saving account deposits. The RBI also permitted banks to pay differential interest rates. The interest rate is different for a deposit amount less than one lakh rupees as compared to more than one lakh rupees.

Key Features of Section 80TTA of Income Tax Act

• The tax exemption for interest income earned in a savings account is restricted to INR 10,000 per year.
• The assessee must take into account their total interest from all savings bank accounts. For example, a person may have many savings accounts with various banks. However, the total interest income from all accounts must be less than INR 10,000 to qualify for the full exemption.
• If the total cumulative interest earned from savings accounts exceeds INR 10,000, a tax exemption of INR 10,000 can be claimed. After that, income tax is levied on the remaining interest earned.
• The tax deduction under Section 80TTA is in addition to the deduction under Section 80C of 1.5 lakhs.
• Individual and HUF savings accounts do not qualify for Tax Deduction at Source (TDS).
• If an individual's Gross Total Income is less than the minimum taxable income, 80TTA will not apply, even if the interest income from savings bank accounts exceeds INR 10,000. For example, if an individual's income for a fiscal year is 200,000, he is free from paying income tax. If interest income totals 50,000 of that 200,000 income, it is not taxable because the total income is beyond the purview of tax liability, and the scope of applying Section 80TTA is not met. In such instances, the individual is exempt from filing a tax return.
• While calculating their total income, the assessee may claim tax exemption.
• Savings accounts protected under Section 80TTA are held by financial institutions such as:

• Banks : These are the banking institutions established under the Banking Regulation Act of 1949. This includes all banks and financial institutions referred to in Section 51 of the Act.
• Post Offices : As defined in clause (k) of Section 2 of the Indian Post Office Act of 1898, these are government financial institutions.
• Cooperative Societies : These are independent organizations of people participating in business comparable to banking within a community motivated by common economic, social, and cultural goals, such as a Co-operative Land Development Bank.

Also Read: Income Tax Refund Status- How to Check  

Eligibility Criteria for claiming deductions under Section 80TTA of the Income Tax Act

Section 80TTA of the Income Tax Act allows the following taxpayers to seek deductions:

• Individual taxpayers or the Hindu Undivided Family (HUF)
• Non-Resident Indians (NRIs) who are Indian residents and own NRO savings accounts.
• A person who has a savings account at a financial institution such as a bank, post office, or cooperative society.

The deduction is not available to the following taxpayers:

• Any deposit in a savings account generates interest revenue. In case the account is held by or for the benefit of a company, a group of people, or a group of individuals; 

Then no deduction will be allowed to any firm partner, association member, or individual member of the body. These taxpayers will not be able to deduct their interest income when calculating their total income.

In general, a company, association of persons (AOP), or body of individuals (BOI) cannot claim the interest deduction. And it is from these firms, AOP or BOI, that the partner or member earns their living. As a result, they are unable to claim the deduction.

• Furthermore, senior citizens are not eligible for the deduction under Section 80TTA. They are entitled to a tax break under Section 80TTB.

Exclusions from 80TTA of Income Tax

• This clause does not apply to deposits made with corporations or Non-Banking Finance Companies (NBFCs).
• Interest earned on time deposits such as recurring deposits, fixed deposits, or other time deposits is not deductible under Section 80TTA. Also, TDS provisions will apply if the interest generated on fixed deposits exceeds INR 10,000/-.
• In addition, no TDS is deducted on interest income earned on bank savings accounts.

Claiming the deduction under Section 80 TTA of Income Tax Act

The first step to claiming deduction under Section 80 TTA of Income Tax Act is to add your total interest income under “Income from Other Sources” in your Return. You will be able to see this deduction under Section 80TTA.   

Here’s an example of of how to claim this deduction under Section 80 TTA of Income Tax Act:

Suppose Mr Dinesh earns a salary of Rs 3,00,000 and has an interest from a bank on a savings account of Rs 5000 and fixed deposits of Rs 20,000 in a financial year. His eligible amount for deduction is Rs 10,000 under section 80C, therefore, the taxable income can be calculated as: 

Also Read: How To Save Income Tax on Income From Salary For Individuals

Conclusion

Income Tax 80TTA assists investors by eliminating the requirement to keep track of the modest amounts of interest accumulated in their savings accounts and include them in calculating taxable income. In addition, this tax deduction provides individuals with a reprieve from the penalty of failing to pay taxes on certain minor incomes. People with lower to the middle-income group who must pay some marginal tax will, on the other hand, receive an additional benefit of INR10,000 in addition to the tax deduction of 1.5 lakhs under Section 80C.