The upcoming interim Union Budget on February 1, 2024, serves as a preliminary financial plan before the 2024 general elections. While major announcements are not expected, some interim measures to provide relief to taxpayers may be included.
One common investment for many individuals is money kept in a savings bank account or with the post office. The interest earned on these accounts is taxable, but there's a deduction of up to Rs 10,000 allowed in a financial year. According to Section 80TTA of the Income-tax Act, 1961, individuals under 60 years old or Hindu Undivided Families (HUFs) can claim this deduction if they have interest income from savings accounts held with banks, cooperative societies engaged in banking, or the post office.
It's essential to understand that taxpayers can't claim a deduction for the interest earned from fixed deposits (FDs), recurring deposits (RDs), or post office time deposits. However, senior citizens aged 60 and above have a separate deduction of up to Rs 50,000 under Section 80TTB for interest earned from savings accounts, fixed deposits, and certain other deposits from specific financial institutions.
It's worth noting that if you choose the new tax regime for the financial year, you won't be eligible for deductions under both Section 80TTA and Section 80TTB (where applicable).
Currently, savings accounts typically offer an interest rate of around 3-4% per year, while fixed deposits offer higher rates, usually around 7% per year, and recurring deposits around 6.5% per year. Some banks advertise higher rates, but these are usually applicable only on balances above a certain level. Given the relatively low-interest rates on savings accounts, many banks allow customers to switch funds to fixed deposits for higher returns while still maintaining some liquidity for emergencies.
Treating interest earned from different bank accounts similarly makes sense now, as banks allow easy transfer of money between savings, fixed deposit, and recurring deposit accounts. It's proposed that the benefits of Section 80TTA, which currently apply to savings accounts, should extend to fixed and recurring deposit accounts as well, leveling the playing field.
The Section 80TTA deduction was introduced in the 2012 Budget to encourage small savings and ease the tax burden on taxpayers. However, the deduction limit has remained unchanged at Rs 10,000 since then. Considering the passage of time, it's overdue for an increase. Raising the limit to Rs 50,000 would be a welcome change, aligning it with current financial realities.
Savings accounts and fixed deposits are not seen as lucrative investments due to their low-interest rates and modest tax benefits compared to riskier options like stocks. By increasing the deduction limit and expanding the scope of Section 80TTA, investment in the banking sector could receive a boost. This approach could gain popularity for its simplicity and ease compared to the complexity of other investment avenues available in the market.