How to Save Tax on Savings Account Interest
Save tax on savings account interest using Section 80TTA and arbitrage funds. Includes top bank rates and a step-by-step approach.
Did you know that the interest your savings account earns every year is fully taxable? Most people focus on finding the highest interest rate but never think about how much of it they actually keep after taxes. This article walks through the tax deductions available, how the interest is calculated, what the top banks currently offer, and a smarter way to keep your money accessible while reducing the tax you owe.
Tax Deductions on Savings Account Interest
Under the old tax regime, you can claim a deduction of up to ₹10,000 on savings account interest under Section 80TTA. Senior citizens get a higher limit — up to ₹50,000 — under Section 80TTB. Neither deduction is available under the new tax regime.
There is one exception: a post office savings account qualifies for a tax exemption of ₹3,500 on an individual account and ₹7,000 on a joint account under Section 10(15)(i). A regular bank savings account gets no such exemption.
How Savings Account Interest Is Calculated
Suppose your bank offers 3% annual interest. That rate is spread across 365 (or 366) days.
Daily Interest Rate = 0.03 ÷ 365 ≈ 0.00008219
If your daily average balance is ₹1 lakh, the daily interest comes to about ₹8.21, which adds up to roughly ₹3,000 per year. For someone with ₹10 lakh in savings, the annual interest jumps to ₹30,000. For ₹30 lakh, it reaches around ₹90,000.
All of that is taxed at your income tax rate. At the 10% rate, the tax is manageable. At 30%, even ₹3,000 of interest costs you ₹1,000 in tax — and ₹90,000 of interest costs you around ₹30,000.
Savings Account Interest Rates: Top Indian Banks
The table below shows the savings account interest rates of the top Indian banks.
| Bank | Interest Rate | Min Balance |
|---|---|---|
| SBI | 2.50% | Nil |
| HDFC Bank | 2.75% | Varies by account |
| ICICI Bank | 2.50% | ₹2,500 – ₹15,000 |
| Kotak Mahindra Bank | 2.50% | Varies by account |
| Axis Bank | 2.50% | Varies by account |
| Bank of Baroda | 2.50% | Varies by account |
| Punjab National Bank | 2.50% | Nil |
| Canara Bank | 2.55% | Nil |
| Union Bank of India | 2.50% | Varies by location |
| IndusInd Bank | 2.50% – 4.00% | ₹10,000 |
Interest is calculated daily based on the end-of-day closing balance. Most salaried employees see their highest balance on salary day, which also means a higher interest credit for that day. If an EMI or other obligation wipes out most of the salary, the average balance stays low throughout the month. And if you have no such obligations, letting that money sit idle in a savings account at 2.5% is not putting it to work.
A Smarter Alternative: Arbitrage Funds
Arbitrage funds buy a stock in the spot market and simultaneously sell it in futures, locking in the price difference with minimal risk. Because their equity exposure stays above 65%, SEBI classifies them as equity-oriented — so gains held for more than a year are taxed at 12.5% (LTCG), and under a year at 20% (STCG). Compare that to savings account interest, which is taxed at your full income tax rate — up to 30%. Returns are typically 6% to 7% per year.
On safety: every spot position is hedged with an equivalent futures sell, so the fund is not exposed to stock price movements. They are regulated by SEBI and securities are held with registered custodians. The only risk is the spot-futures spread narrowing temporarily — this can reduce returns but does not affect your principal.
The trade-off is liquidity — redemptions settle in T+2 or T+3 days, not instantly like a savings account. You can explore arbitrage funds on Zerodha Coin or browse the full category at AMFI India.
Banks That Offer High Savings Account Interest Rates
Some banks offer savings account rates that come close to fixed deposit returns. These are mostly small finance banks, which use higher rates to build their deposit base. The catch is that the headline rate applies only to the portion of the balance in that specific tier, not the full balance. The minimum balance requirement is also typically higher at these banks.
| Bank | Type | Peak Rate | Rate (Up to ₹1L) | Min Balance |
|---|---|---|---|---|
| Unity SFB | Small Finance Bank | 7.75% | 6.00% | ₹1,000 – ₹5,000 |
| Suryoday SFB | Small Finance Bank | 7.60% | 2.50% | ₹10,000 |
| Equitas SFB | Small Finance Bank | 7.50% | 5.50% | ₹10,000 |
| Utkarsh SFB | Small Finance Bank | 7.25% | 5.00% | ₹2,500 – ₹5,000 |
| Ujjivan SFB | Small Finance Bank | 7.15% | 2.50% | Zero balance available |
| Jana SFB | Small Finance Bank | 7.00% | 2.50% | ₹2,500 – ₹5,000 |
| IDFC First Bank | Private Bank | 6.50% | 3.00% | ₹25,000 |
| AU SFB | Small Finance Bank | 6.50% | 2.50% | ₹2,000 – ₹5,000 |
A higher interest rate also means more taxable interest income. Factor that in before choosing a high-interest savings account solely for the headline rate.
Conclusion
A savings account is not the only way to keep money liquid. Choosing a bank solely for its high savings rate without accounting for the tax cost is a common mistake. Arbitrage funds are a safe option — regulated by SEBI, with every position hedged — but they are not instantly liquid. You can compare the two after tax at your own slab with our arbitrage fund vs FD calculator. Redemptions take T+2 or T+3 days, so they cannot replace a savings account entirely. The right approach is to keep a working balance in your savings account for day-to-day needs and move the surplus into arbitrage funds to earn more and pay less tax.
References:
- State Bank of India — Interest Rates
- HDFC Bank — Interest Rates
- ICICI Bank — Savings Account Interest Rate
- Kotak Mahindra Bank — Interest Rates
- Union Bank of India — Rate of Interest
- IndusInd Bank — Savings Account Interest Rate
- IDFC First Bank — Savings Account Interest Rate
- Income Tax Department, India
- SEBI — Arbitrage Mutual Fund
- AMFI India — Mutual Fund Categories
- Zerodha Coin — Arbitrage Funds
Sources and references
- Income Tax Department, Government of India — Sections 80TTA and 80TTB, and rules on taxation of interest income
- Reserve Bank of India — savings-account interest and deposit regulations
Rates are effective as of July 2026 and are subject to change. Verify with the respective bank's official website.
This analysis is for educational purposes only and does not constitute investment advice.
Frequently asked questions
Is interest on a savings account taxable in India?+
Yes. Savings account interest is added to your total income and taxed at your slab rate, which can reach 30% plus cess. That is quite different from equity capital gains, which are taxed at a flat rate, and it is the main reason a high headline savings rate can be misleading once tax is taken into account.
How much savings account interest is tax-free under Section 80TTA?+
Up to Rs 10,000 of savings account interest in a financial year can be deducted under Section 80TTA. The limit applies across all your savings accounts combined rather than to each account separately.
Do senior citizens get a higher exemption?+
Yes. Senior citizens claim under Section 80TTB instead, with a higher limit of Rs 50,000. That section is also broader — it covers fixed and recurring deposit interest as well as savings interest, which makes it considerably more generous than 80TTA.
Can I claim 80TTA or 80TTB under the new tax regime?+
No. Neither deduction exists under the new regime; both are available only under the old one. If you have opted for the new regime, your savings interest is taxable from the first rupee, which changes the arithmetic on chasing a high savings rate.
Is the bank with the highest savings rate always the better choice?+
Not necessarily. Picking a bank purely on its headline rate without accounting for tax is a common mistake, because that interest is taxed at your full slab. An alternative taxed at a lower rate can leave you with more money even when its gross return looks similar or slightly lower.
Can arbitrage funds replace a savings account?+
Not entirely. They are more tax-efficient, taxed at 12.5% on gains held over a year rather than at your slab rate, and typically return 6% to 7%. But redemptions settle in T+2 or T+3 working days rather than instantly. The practical approach is to keep a working balance in the savings account for daily needs and move only the surplus.
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