Fixed deposits are investment instruments that are offered by a large number of banks and NBFCs (Non-Banking financial Organisations) where one can deposit funds for a higher fixed deposit interest rate than savings accounts. A variant of the fixed deposits, referred to as tax saving FD, allows investors to enjoy tax benefits. Termed as one of the safest investment options that helps you higher the amount of your investment without having to fall victim to market risks, the returns from tax-saving FDs are not tax-free.
How Does Tax-saving FD Help You Save Tax?
Planning to invest early is always a wise idea. But, one also needs to start planning tax-saving hacks soon in life. By investing in tax-saving fixed deposits, one can claim tax deductions up to Rs. 1.5lakh under Section 80C of the Income Tax Act, 1961, in a financial year. The maximum deductions can be requested from the total gross income on investing in tax saving FDs.
Under section 80C of the Indian Income Tax Act, on investing up to Rs.1.5lakh in various financial instruments, one can claim tax deductions on the amount that is invested. Tax saving fixed deposits fall under this category. Other tax-saving financial tools include public provident funds, equity-linked savings schemes, insurance premiums, etc. One can invest the entire amount in one financial tool or spread it across many instruments.
Some features associated with tax-saving FDs are:
Lockin PeriodThe tax savings FDs come with a lockin period of 5years. So, one can invest in these financial tools if they want to invest funds for a medium-term. However, premature withdrawals can be made after the 5year lockin period is done.
Minimum AmountThe minimum amount that needs to be invested in these financial instruments varies from one bank to another. In some banks, the minimum amount may be Rs.1000, and in some, the minimum can be as high as Rs. 5000.
Interest RatesThe rate of interest on tax-saving fixed deposits generally ranges from 6.5% to 8.5%. The interest rates vary from bank to bank. In the case of senior citizens, the interest rates offered by the banks are slightly higher.
Interest EarnedThe fixed deposit interest rate earned from the tax-saving fd is taxable under the investor’s tax bracket. Therefore, TDS (Tax Deductible at Source) is applicable on the interest earned through these financial tools. Banks deduct 10% TDS if the investor’s interest made across all deposits in all the branches is more than Rs.10,000 in a financial year. However, the banks will deduct TDS at 20% if the depositor has not submitted the PAN. The returns can be withdrawn on a monthly or quarterly basis or can be reinvested.
How to Invest in Tax Saving Fixed Deposits?
Nearly all Indian banks offer tax-saving fixed deposits. Therefore, there are some factors that investors should consider while choosing one. Some of these are:
- The interest rates offered by the banks should be compared.
- After comparing the interest rates, an investor should consider factors such as safety, services, and returns provided by the banks.
Considered a reliable form of investment, the tax-saving fixed deposit has always been a popular saving option for individuals for decades. Moreover, being bank-based investments and closely monitored by the RBI, these financial tools are familiar among the masses for the low-risk nature. Therefore, investing in tax saving FDs can be a wise option if you want guaranteed returns along with tax benefits.