When savings account gives tax benefit and better returns than FDs

If you prefer keeping some funds in a savings account, there are a few things you should keep in mind this tax season.

According to a new Section 80 TTA introduced in the union budget last year, savings account interest income up to Rs 10,000 will get a tax deduction as per this section. The savings account which you hold in all banks, that is public sector, private sector as well as foreign banks come under this section. That’s not all, the deduction is applicable even if it is in a co-operative bank or India Post.

Moreover, both individuals as well as Hindu undivided family qualify for this deduction.

[caption id=“attachment_597577” align=“alignleft” width=“380”]  While most banks offer 4.5 percent per annum as rate of interest, there are a few banks which offer interest rate more than the 4.5 percent like 6 percent, 6.5 percent, 7 percent. Picture: 401(k)/Flickr[/caption]

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All accounts: “Keep in mind, that this deduction of Rs 10,000 on savings account interest income is all bank accounts put together,” said Anil Rego, Chartered Accountant and CEO, CEO of Right Horizons, Investment Advisory and Wealth Management. There is a good possibility that you might be able to make the most of this deduction if you have parked your three-six months emergency funds in savings banks accounts. Many people do this.

Better than FD: In fact, while most banks offer 4.5 percent per annum as rate of interest, there are a few banks which offer interest rate more than the 4.5 percent like 6 percent, 6.5 percent, 7 percent.

For instance, let us say you park Rs 1 lakh in an account that offers you 7 percent. You will earn a tax-free return of Rs 7,000 for a year. And if you invest that same amount in an FD that offer 8 percent, your post-tax return will be 5.5 percent (for those falling in the 30 percent tax bracket). “In fact, even if you invest that Rs 1 lakh in an FD that offer 9 percent per annum, and you are in the highest tax bracket, you will still only get a post-tax return of 6.21 percent, which is lesser than the savings account which offer 6.5 percent or 7 percent,” says Rego.

So, if you have made an interest income up to Rs 10,000 do make the most of the section 80 TTA by claiming this deduction. And, no way are we saying that you should park all your funds in a savings account, but if you are not comfortable parking emergency funds in liquid funds and simply stick to FD, you might want to check out high interest savings account and take your call.