Benjamin Franklin has said “In this world nothing can be said to be certain, except death and taxes”.
Tax is a tough, painful and unavoidable part of our lives. Rather than ignoring it, it is better to quickly understand how it works. It is important that you know the tax implications of all your income sources so you can knowingly deal with it.
You might wonder why your savings account attracts tax, even after you have deposited the money into your account after paying your dues. A savings account earns you interest, sometimes as low as 4% and sometimes going up to 7% depending on the bank and the specific scheme under which your account falls.
Any interest earned attracts tax. As a conscientious professional, you might already have a CA to help you calculate your tax. However, as a conscientious professional, you need to know how to calculate the tax by yourself.
Check out these three tips to get started:
What Tax Are You Eligible for?
Before rushing off to sign a tax cheque away, understand your tax eligibility. Do you fall under the taxable bracket or do you get an exemption? You don’t need to pay tax for every rupee that you earn as interest. According to Sec 80TTA of the IT Act, interest up to Rs 10,000 does not turn the IT department’s spotlight on you. Any amount earned after that, and this includes your savings account, fixed deposits, post office schemes and recurring deposits, brings you into the taxable category.
Tax is to be paid only on the amount exceeding Rs10,000 and not the entire figure. So, if you earn Rs 15,000 as interest on your savings account, you need to pay tax only on Rs 5000 and not the entire 15,000. The section applies to individuals and HUFs.
Is There A Deduction Limit That You Can Avail Of?
All is not lost, though. The rules favour the SME India program. There are deductions and provisions made to get further exemptions on your income from savings accounts.
Section 10(15)(i) of the IT Act allows an individual to shave off a further Rs 3500 if the interest is earned from a Post Office Savings scheme. The amount doubles in the case of joint account holders. You can claim this exemption in on top of the deduction availed under section 80 TTA.
Know How The Interest Is Computed
How is interest calculated in your bank?
Some banks offer interest on a monthly basis. This is done on the minimum balance that the account had throughout the month. How does this work? Say you maintain Rs 2 lakh in your account throughout the month, but for one day you withdraw the money and it comes to Rs 25,000 for one day. The bank will consider that as the balance and calculate interest according to that. This does not give you – the depositor- the full advantage. Many banks today calculate interest on a daily basis, calculating it on the amount present in the account at the end of the day. This gives the accountholder greater benefits on their deposited amount.
Tax calculation need not be tough if you stay on top of the rulings. Do have a look at exemptions for business loans while calculating tax payable.