A tax-saving FD is an investment option that offers tax deductions under Section 80C of the Income Tax Act. It also provides a fixed rate of interest and has a 5-year lock-in period.
These deposits can be made by individuals or HUFs in lump sum amounts. Premature withdrawals and loans are not permitted.
Tax Savings
Investing in tax saving FDs helps you earn a guaranteed return of your principal investment and interest component without being subject to market fluctuations. This teaches you the lesson of saving, which is a very important financial discipline to acquire. Also, unlike other investment instruments that offer varied returns depending on the markets, FDs allow you to invest a lump sum in one go and promise you a fixed amount at the end of the investment tenure, unlike mutual funds or other investments.
There are many FD types available in the market, but only certain ones are eligible for tax deductions. These include PPF, NSC, EPF, ELSS, RDs, Sukanya Samriddhi Scheme, and tax-saver FDs. These come with a lock-in period of five years, and you cannot withdraw the money before that time. It is also not possible to avail loans or overdraft facilities on this type of FD. Moreover, tax exemption is only available to the first holder in case of a joint mode of holding.
Insurance Tax Relief
If you purchase medical insurance directly from an approved insurer, you can enjoy tax relief on the premium paid. This is known as tax relief at source (TRS). You don’t need to claim this benefit from Revenue, but the deduction will be automatically deducted from your taxable income.
Another way to reduce your taxes is by investing in a tax-saving fixed deposit. These FDs are eligible for a deduction under Section 80C and come with a lock-in period of five years. These FDs are available to individuals and Hindu Undivided Families. They can be single or joint holder type deposits, but the tax benefits are only available to the first holder.
Individuals can also choose not to declare their FD interest in their tax return and submit Form 15G or Form 15H as applicable. This will prevent banks from deducting TDS and help them avoid paying extra taxes later. However, this method will only reduce their tax liability by a small percentage.
Interest Rates
Tax-saving FDs are a great way to earn secure returns and bring down your tax liability. They come with a fixed interest rate for the entire tenure, which protects you from fluctuations in the market. They are also ideal for low-risk investors, who can enjoy guaranteed1 returns and compounding benefits.
You can invest in a tax-saving FD as a single or joint account holder. However, only the primary holder can claim the tax benefits. Similarly, you can invest in PPF as an individual or HUF but can only withdraw the full investment after 15 years.
If your total income, including the interest earned on a FD, does not cross the threshold of taxability, you can avoid TDS by submitting Form 15G or Form 15H. The bank will then not deduct taxes from your FD interest income and you can include it when filing your annual tax return. However, it is recommended to keep track of your total income throughout the year.
Tenure
In a tax saving FD, the deposit amount is locked for a tenure of five years. The interest earned on this investment is taxable as per the prevailing tax laws.
The tax-saving FD interest rates remain fixed for the entire tenure, irrespective of market fluctuations. Moreover, you can choose to get the applicable interest payout on a monthly, quarterly or annual basis. However, you cannot take a loan against this type of deposit.
Unlike a regular FD, tax-saving FDs do not offer the facility of premature withdrawals or overdraft (OD). They also do not have any loan facilities and the amount can be withdrawn only after five years. However, if you have submitted Form 15G or are a senior citizen, the bank does not deduct TDS on the interest earned on your FD. The maturity amount is directly credited to your savings account or given to you as a demand draft. This is different from PPF which allows you to withdraw the money after 15 years.
