How Do We Calculate Tax on your savings bank account interest and FD/RD (Fixed Deposit/Recurring Deposit) interest?
Savings Bank Interest
Savings bank interest is the return a depositor earns on the balance maintained in a regular savings account. It is designed for liquidity and day to day usage rather than long term wealth accumulation.
Key Features
- Variable interest rate: Banks revise savings rates periodically based on market conditions and RBI policies.
- Interest calculation: Most banks calculate interest on the daily closing balance and credit it quarterly or half yearly.
- High liquidity: Funds can be withdrawn anytime without penalty.
- Lower returns: Savings account interest rates are generally lower than fixed deposit rates because the account offers high flexibility and low risk to the depositor.
Tax Treatment
- Interest earned is taxable under Income from Other Sources.
- Up to ₹10,000 per year is deductible under Section 80TTA (for non senior citizens).
- Senior citizens can claim up to ₹50,000 under Section 80TTB.
Fixed Deposit (FD) Interest
Fixed deposit interest is the return earned on a lump sum amount locked in for a fixed tenure. It is meant for stable, predictable growth.
Key Features
- Fixed interest rate: The rate is locked at the time of deposit and remains unchanged throughout the tenure.
- Higher returns: FD rates are significantly higher than savings account rates, as confirmed by current bank data showing general public FD rates ranging roughly from 3% to 7% per annum depending on tenure and bank.
- Flexible tenures: Typically from 7 days to 10 years.
- Premature withdrawal rules:
- Allowed, but banks may reduce the interest rate and apply penalties.
- No interest is paid if withdrawn within 7 days for domestic/NRO deposits.
Tax Treatment
- FD interest is fully taxable under Income from Other Sources.
- Banks deduct TDS if interest exceeds ₹40,000 (₹50,000 for senior citizens).
- Tax saving FDs (5 year lock in) qualify for Section 80C deduction up to ₹1.5 lakh.
Comparison Table
| Feature | Savings Bank Interest | Fixed Deposit Interest |
|---|---|---|
| Rate Type | Variable | Fixed |
| Typical Range | Lower (2.5%–4%) | Higher (3%–7%+) |
| Liquidity | Very high | Locked in (premature withdrawal allowed with penalty) |
| Risk | Very low | Very low |
| Interest Calculation | Daily balance, credited quarterly/half yearly | Depends on tenure; paid monthly/quarterly/annually or at maturity |
| Tax Benefits | 80TTA/80TTB | 80C only for 5 year tax saving FD |
| Best For | Emergency funds, daily usage | Stable returns, medium to long term savings |
What do I choose and in which case?
- Choose Savings Account when:
- You need instant access to funds.
- You maintain an emergency buffer.
- You prefer flexibility over returns.
- Choose Fixed Deposit when:
- You want predictable, guaranteed returns.
- You have surplus funds not needed immediately.
- You want to lock in higher rates for a specific period.