Purpose and tax implications of a Savings Account

November 03, 2020


Before India’s banking system was strengthened, people two generations ahead of us, held their money at home – in the form of hard cash. Whatever remained after the regular expenses were met, went religiously into a tangible piggy bank. But now, with India’s network of banks emerging strong, the scenario has changed, for the most part at least. You’ll agree, because you, too, probably depend on your Savings Account to safeguard the money you save after meeting your everyday expenses.

But when you take a closer look at it, what is the purpose of a Savings Account, really? And with regard to tax planning, what are the tax implications, if any, of the money you save in that account? Let’s take the first question and get started.

What is the purpose of a Savings Account?

The primary purpose of having a Savings Account is to have a safe space to hold your money in a secure location. Let’s look at an example to understand this better.

  • Say you earn Rs 50,000 each month.
  • And say your fixed expenses for all your necessities comes up to Rs 20,000 each month.
  • So, that leaves you with Rs 30,000, isn’t it?
  • Of this, you set aside further Rs 10,000 for discretionary expenses, and you’re left with Rs 20,000 in savings each month.

If you keep saving it up in cash, you’re going to accumulate Rs 2,40,000 by the end of the year. And clearly, it’s not safe to have that much cash lying around at your house. Here’s where a Savings Account can prove to be useful.

What are the advantages of a Savings Account?

Having a Savings Account gives you many advantages. Right from enabling digital usage to tax planning benefits, there’s a lot that a Savings Account does for you. Here are some of the main advantages.

It allows you to earn passive income

With a Savings Account, you can earn passive income in the form of Savings Account interest. Different banks offer different Savings Account interest rates, and even within the same bank, the Savings Account interest rates may vary depending on the amount of funds in your account. While the amount of Savings Account interest may not be very high, it’s still a gain when compared with keeping all that cash idle at home.

It acts as a stepping stone to many other avenues of investment

In addition to earning Savings Account interest, there are many other ways in which a Savings Account helps you multiply your money. With this account, you can enter various investments like Recurring Deposits, Fixed Deposits or even Mutual Funds using a Systematic Investment Plan (SIP). Savings Accounts, when linked with Demat and Trading Accounts, also make it possible for you to trade in the stock market.

It makes bill payments easier

It’s neither possible nor practical to meet all of your regular expenses on a cash basis. And given the way contactless payments are being preferred due to the pandemic, it’s also safer to go digital. And a Savings Account can be the first step in your digital journey. With this account, you can make use of multiple contactless modes of payment like Customer Care and Internet Banking. These modes are quick, efficient and convenient.

It may make you eligible for many other additional services

Depending on the type of Savings Account you open with your bank, you may also become eligible for a variety of add-on services. Banks often provide many other benefits linked with Savings Accounts. For example, account holders may be eligible for Credit Cards with exclusive benefits, pre-approved loans, Overdraft facilities, cashback offers, Reward points and even access to Airport lounges, among other things.

What are the tax implications of a Savings Account?

The amount that you deposit in your Savings Account is not taxable, but the interest earned on that amount is. Knowing how the Savings Account interest is taxed can help you get going with tax planning. As per the Income Tax Act, the interest you earn from your Savings Account is taxable, irrespective of the Savings Account interest rate. It is taxed under the head ‘Income from other sources.’

Like many other taxpayer-friendly provisions, there’s one that also reduces the burden of taxation on this interest. As per Section 80TTA, the interest you earn on your savings is deductible up to Rs 10,000 per financial year. This deduction can be claimed by individuals and Hindu Undivided Families (HUFs) only. It is valid on interest earned from all Savings Accounts held in banks, post offices or co-operative banks. Interest earned beyond Rs 10,000 from any of these sources is taxable.



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