The Buyt Desk
As the name suggests tax saving Fixed Deposits(FD) are the investment that saves your tax. This deposit scheme gives you the benefit of tax deduction under Section 80C of the Income Tax Act, 1961. An investor can claim a deduction of up to Rs 1.5 lakh in a year. Tax saving FDs guarantee you a fixed return over a fixed tenure. These FDs are exactly the same kind of fixed deposit that banks provide but the two biggest differentiators are that they provide a tax deduction and have a strict lock-in period. The interest rate for a tax saving FD ranges from 5.5- 7.5%.
Lock-in period of Tax Saving FDs
If you invest in a tax-saving FD then be prepared for a 5 to 10 year lock-in period. The tax saving instruments have a mandatory lock-in time. Tax Saving FD does not allow premature withdrawal. These FDs are strict about partial withdrawal too. Once the investment begins you cant opt-out midway. You have to continue with the plan till the pre-fixed maturity date.
How much can one invest?
Tax Saving FD can be opened in private or public banks. Banks have been facilitating online as well as offline service for starting an FD. The maximum limit that one can invest in a year is up to Rs 1.5 lakh. The minimum amount that you require to open a tax-saving FD could differ from bank to bank but most of the bank have Rs 1000 as the minimum required amount. Though in rural areas the minimum required amount could be of less than Rs 1000 as well. Do keep in mind that investment in a tax saving FD can’t go beyond the upper limit of Rs 1.5 lakh as that’s the tax deduction that one can claim on this investment.
Tax Liability
The interest of Tax saving FD is fully taxable as per the investor’s tax slab. The interest income is considered under the ‘Income from other Sources’ head. The banks will deduct the tax at the source automatically. If your income is not taxable then you can avoid TDS by submitting Form15G( or Form 15H if you are a senior citizen) to the bank.
Points to Note
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No loan facility is allowed on tax saving FD. One can not avail loan against these FDs.
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There is a provision of nomination in tax saving FD and investors can nominate their representative to receive the benefits in case something happens to the primary holder of the FD. Though if the account is being held on behalf of a minor then a nomination is not allowed.
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The investor must ensure that his/her PAN card is linked to the savings account because right after the FD matures the amount is transferred to the bank.
Conclusion
Tax saving FD gives you a slightly higher return on your deposit as compared to other FDs as they have a tighter lock-in with no partial or premature withdrawals. If you are unable to make payment in between then also you will not be allowed to withdraw your money. You will have to wait until the lock-in period ends. You want to save tax and want higher guaranteed returns then tax saver FDs something that you should definitely look at.
