Section 80TTA & 80TTB-How to earn tax free interest

It is very heart breaking when we are not able to get full return on our investment. Yes, we are discussing about earning interest income. This article will provide information regarding How to earn tax free interest of Rs.10,000 for a year  in case of Individual (other than senior citizen) and HUF and Rs.50,000 in case of senior citizen as per Section 80TTA & 80TTB

Government introduced Section 80TTA in Income Tax Act to provide relief as deduction up to Rs.10,000 in case of interest income from saving account and deduction of Rs.50,000 as per section 80TTB in case of senior citizen. Details of deductions are as under:

Deduction in respect of interest –Section 80TTA & 80TTB

Section 80TTA:

1. Where an individual or a Hindu undivided family earn interest on deposits (not being time deposits) in a savings account with—
   • a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act);
   • a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank); or
   • a Post Office as defined in clause (k) of section 2 of the Indian Post Office Act, 1898 (6 of 1898),

       the whole of such amount or  ten thousand rupees whichever is less , allowed as deduction from total Income .

Section 80TTB:

1. In case of Senior Citizen deduction above section of 80TTA is not applicable . In case of senior citizen deduction is allowed as per section 80TTB . As per this section , Actual interest  or Rs.50,000 whichever is less, earned  on deposits with bank , co-operative society or post office as mentioned above is available as deduction with effect from Financial year 2018-19 .
2. In case of senior citizen, deposits may include deposits in Saving account, Recurring deposit account; Double Benefit deposits, Term deposits, Monthly income certificate, etc. Such deposits may be placed by the assessee before he turned to 60 years. Once he attains the age of 60 years during the previous year, he may claim deduction in respect of interest earned during that year as per section 80TTB.
3. In case of senior citizen interest earned on deposit is covered while in case of Individual (other senior citizen) and HUF, only interest earned from saving account is covered. Further amount of interest deduction is Rs.10,000 and Rs.50,000 respectively allowed.

Treatment of both deductions in Income Tax Returns (ITR):

1. Above mentioned interest has to first offered as income i.e. it has to be added in total income while filing return of income and need to claim deduction separately as mentioned above.
2. Deductions under both sections are required to be computed in aggregate. It means interest of nature specified above from all sources should not exceed deduction specified in respective section.
3. Where the income referred to in this section 80TTA or 80TTB is derived from any deposit in a savings account or deposit respectively held by, or on behalf of, a firm, an association of persons or a body of individuals, no deduction shall be allowed under this section in respect of such income in computing the total income of any partner of the firm or any member of the association or any individual of the body.

Definitions:

1. Time Deposits:For the purposes of this section (80TTA), “time deposits” means the deposits repayable on expiry of fixed periods. i.e. Interest earned on Fixed Deposit and Recurring Deposit is not allowed as deduction under this section for Individual and HUF (other than interest covered in section 80TTB) .
2. Senior Citizen : For the purposes of this section (80TTB), “senior citizen” means an individual resident in India who is of the age of sixty years or more at any time during the relevant previous year.

Comparison of deduction under both sections are provided below:

Investment evaluation:

1. In case of individual (other than senior citizen) and HUF saving account interest of Rs.10,000 is allowed as deduction . There are banks in market who is offering saving bank account interest up to 5.5% -6% p.a. so in case annual interest is less than Rs.10,000 , this is completely tax free income by way of deduction as explained earlier. You can check latest FD rates on Economics Times. Click on link to check Fixed Deposit Rates.
2. In case of Fixed Deposit which is normally providing interest rate of 6 % to 7% for more than 180 days duration , effective return post –tax will be only 4.2% to 4.9% (assuming one is falling in 30% tax bucket and surcharge and HEC extra) . This can be a good investment and further allow good liquidity and security as compare to investment in equity market or other high risk investment.
3. In case of senior citizen , it covers total interest on deposits so it is not advisable for senior citizen to invest in high risk investment. Deposit Interest deduction up to Rs.50,000 is available . This will provide fix tax free income by way of deduction as explained earlier.

Conclusion- Section 80TTA & 80TTB:

So Go and open account with bank which provides highest interest income to take benefit of this deduction to earn tax free interest by way of deduction as per Section 80TTA & 80TTB.

Do read our post on How to do money management as a first step for financial planning. Click on below link to read this post.

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