The Buyt Desk
Tax Saving bank Fixed Deposit and Post Office Time Deposit are two types of investment which help you in saving tax too. While both have a tax benefit under Income Tax Act, the purposes of both are different.
Investors with a low-risk appetite can reduce their taxable income by opting for tax-saving investments. Tax advantage fixed deposits come with a fixed lock-in period. They help in saving tax and earnig returns as well. Investors know that they have to park their money in Fixed Deposit (FD) but are confused between bank and post office. Both Post offices and bank offer investors various tax-saving deposit schemes including Bank FD and Post Office Term Deposits (TD).
Tax benefits
Under Section 80C of the Income Tax Act, 1961, Deposit schemes are eligible for the tax benefit which is up to Rs 1.5 lakh tax deductions on investments. But you should not invest in these schemes only for tax benefits. Invest in these schemes only if it matches your personal finance plan and is in line with your investment strategies. These tax-advantaged FDs or TDs may not fit in everyone’s financial plan but are a good fit for people with low-risk appetites. You should also keep in mind all the TD and FD aspects before making the investment.
What are the features of a Bank Fixed Deposit?
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After a minimum lock-in period of 5 years, the interest earned on Bank FDs is taxed as per the investor’s tax bracket.
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If the FD investment is made jointly, only the first holder as per the FD receipt will be eligible for tax advantages.
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Investors can either opt for cumulative or non-cumulative interest alternatives on tax-saving FDs.
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Tax-saving FDs with a five-year lock-in period do not allow premature withdrawals.
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For medium-term investments with tax-saving benefits, tax-saving FDs with a 5-year lock-in term are ideal.
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Banks are offering interest rates between 6.25% – 6.5% currently on this scheme.
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An additional 0.50% interest rate is offered for senior citizens. Few banks offer a special scheme with additional benefits for senior citizens.
What are the features of Post Office Time Deposit (POTS)?
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POTS is also known as National Saving Time Deposit Account.
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Under Section 80C of the Income Tax Act of India, 1961, the 5-year fixed deposit account is eligible for an income tax deduction like Bank FDs.
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Interest on the TD at the post office is calculated on a quarterly basis and paid annually.
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Withdrawing the investment before it matures from the POTS’ tax-deferred savings account is not allowed.
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POTD has a term option of four investment periods of one year, two years, three years and five years with a 5 year period offering a 6.7% interest rate and the rest with a 5.5% interest rate.
Tax Deducted at Source (TDS)
On tax-saving fixed deposits, FD interest is paid out either monthly or quarterly. Investors can choose to have it or put it back into the market. The interest earned is taxed as per the tax band of the investor.
Summing up
TDs from post offices and FDs from banks are significantly identical. But both have certain distinct features. Bank FD’s interest rates vary from one to another as they are regulated by individual banks. While Post Office TD’s interest rates remain the same across the country and change quarterly, as they are managed by post offices. POTD is backed by the government of India while Bank FDs are not. Bank FDs can be bought for a short duration of four days or for a long term of 10 ten years. But only four terms are available with POTDs which are one, two, three or five-year POTD. POTD have better interest rates when compared to bank FDs. But POTDs do not offer better tax-saving interest rates to senior citizens like bank FDs.
