Home » What is a tax-saving fixed deposit?

What is a tax-saving fixed deposit?

What is a tax saving fixed deposit?

Photo courtesy Nataliya Vaitkevich.

A fixed deposit helps an individual to earn interest on their savings without being too concerned about volatility, unlike stocks or mutual funds. There is a fixed deposit of various tenures offered by the banks and many of the banks offer a five-year tax saving fixed deposit that helps in the saving of taxes.

The tax saving fixed deposit offers tax deduction under section 80C of the income tax act, 1961. The lock-in period is 5 years and no premature withdrawals, loans or overdraft facilities are available. Deposit in a tax saving FD can be either in a single holder deposit or a joint holder deposit. Even if you opt for a joint holder deposit the tax benefit is available only to the first holder.

The tax saving fixed deposit is a bank-based fixed deposit and the functioning of the banks is closely monitored by the RBI, so it is relatively safe and has a low risk. It is easy to invest in a tax-saving fixed deposit as the account can be opened online or at any of the nearby bank branches. The interest rates on the tax saving fixed deposits vary in different banks so a person can compare the interest rates before making an investment. Resident Indian citizens, HUFs, and NRIs can invest in tax-saving fixed deposits.

There is no auto renewal facility for the tax-saving FD and the interest rates remain unchanged over the five-year period.

How much can a person invest in tax-saving FD?

A person can invest between Rs. 100 and Rs 1.5 lakhs in a financial year in a fixed deposit.

How much tax can be saved with a tax-saving FD?

The amount of tax that can be saved will depend on the tax bracket of the individual and the sum that is invested in the FD.

The bank will deduct TDS at 10% if the interest income exceeds Rs 10000 in a financial year across all deposits and branches, and if a person has not submitted the PAN, TDS will be deducted at 20%. A person can avoid TDS by submitting form 15G to the bank (15H for senior citizens).

How will the interest amount be received?

An individual can opt for a monthly or a quarterly payment mode or may choose to reinvest the interest amount.

What are the documents required to be submitted to invest in a Tax saving FD account?

To open a tax-saving FD account an individual needs to submit identity proof and address proof. The documents that can be submitted are-

Identity Proof – Passport, driving license, PAN Card, government ID card, voter ID card.

Address Proof– The electricity bill, telephone bill, passport, bank statement, etc.

Advantages of Tax Saving fixed deposit over other 80C instruments-

The tax-saving FD has certain advantages when compared with other 80C instruments. The PPF has a lock-in period of 15 years while the tax-saving fixed deposit has a lock-in of five years. The minimum investment required for tax-saving FD is Rs. 100 while in a PPF, an account can have an opening balance of Rs 100 but the minimum investment has to be Rs. 500.

When we compare the tax saving FD with the equity-linked saving scheme (ELSS) the advantage of the tax saving FD is that it is not market linked while the minimum investment required for ELSS is Rs. 500.

Who should invest in tax-saving fixed deposits?

A person has to consider the investment horizon, age, and risk appetite before taking any investment decision. So a person who requires tax exemption under section 80C can invest in the tax-saving FD. The other thing is that the tax-saving FD has a low risk and provides almost guaranteed returns. So persons nearing retirement can invest in the instrument.

The tax saving fixed deposit has higher returns than the savings banks’ account. A person can make a lump sum one-time deposit which is a convenient feature if they have surplus savings. It is totally secure, unlike market-linked products. Most of the banks offer slightly better interest rates to senior citizens.

Leave a Reply

Your email address will not be published. Required fields are marked *