The Buyt Desk
One has his/her choice when it comes to saving their hard-earned money based on the desired amount he/she wishes to save, the purpose of saving, risk appetite and the time horizon for the same. A wise investment always assists safe and secure growth of one’s wealth. And Fixed Deposit (FD) is one such savings option provided by banks and Non-Banking Financial Companies (NBFCs).
What is a tax-saving FD?
A tax-saving FD extends tax deductions under Section 80C of the Income Tax Act, 1961. The amount you invest in these FDs can be claimed as tax deduction of up to Rs 1.5 lac per annum. This FD is the same as any other bank FD offering stable returns regardless of market fluctuations except for a minimum of 5 year locking period. The investment in regular FD will not give you a tax deduction. But the interest earned on tax-saving FD is taxed.
Tax on Interest
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The interest earned on tax-saving fixed deposits is taxable as per the investor’s tax bracket. The interest on a tax saving FD has to be reported under the ‘Income from other Sources’.
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The banks will also deduct tax deducted at source (TDS) on FD if the interest earned is more than Rs 40,000.
How to do Tax-saver Fixed Deposits?
Choose the bank where you want to open the FD and decide on the amount you want to put in and for what tenure. Based on the amount invested and the locking period the interest rate is decided by the bank. The same interest rate is applied for the whole tenure, irrespective of any interest rate fluctuations in the future.
Eligibility and who must?
Only Resident individuals and Hindu Undivided Families (HUF) individuals can open a tax saving FD with a bank or post office, or NBFCs. This scheme is beneficial for all individuals as it is risk free. As it provides dual benefits of guaranteed returns and low risk it becomes the best choice for the one nearing retirement and one who has a low-to-zero risk appetite.
Important features that will help you make a choice
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The rate of interest is higher than a savings account.
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The rate of interest of regular FDs and tax-saving FDs is almost similar.
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Premature withdrawals are not allowed.
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Loans or Overdraft (OD) on tax-saving FDs is not available.
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It has a minimum lock-in period of five years, which can be extended for a longer tenure if desired.
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Auto-renewal facility is not available for Tax Saving Fixed Deposits.
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Interest rates remain unchanged for the locking period
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The minimum amount of Rs 1,000 can be deposited
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The maximum amount of Rs 1.5 lac can be deposited in a financial year.
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These can be booked with quarterly, maturity, half-yearly or monthly interest payout.
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Interest rates vary from bank to bank and for Indian citizens, senior citizens and HUF.
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Deposit accounts can be in a single or a joint mode but only the first holder can claim tax benefit under section 80c.
Why Tax Saving Fixed Deposits compared to other Section 80C investments?
A Tax-Saving FD has few advantages over other Section 80C investments like
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A tax saving FD is not market-linked like equity-linked savings scheme (ELSS).
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Public Provident Fund (PPF) has a lock-in period of 15 years while tax saving FD is just 5 years.
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The National Pension Scheme (NPS) can be claimed only after retirement.
Summing up
Tax Saving Fixed Deposits is safe and secure as it has tax exemption, guaranteed returns, zero risk and growth. Always look up for interest rates of a Tax Saving FD scheme that different institutes offer before investing your wealth.
