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In India, fixed deposit is considered one of the safest means of investment. Many people use FDs to store wealth over a long time due to their flexibility and guaranteed returns. To make fixed deposits more attractive, banks offer a special type of FD scheme called tax-saver FDs which allows the investor to claim deductions under 80C of the Income Tax Act.
Here in this article, we will deep dive into tax-saving fixed deposits, features, benefits, other tax-saving strategies and much more.
Tax saving fixed deposits refers to a special kind of FD account which allows the account holder to claim tax deductions under Section 80C of the Income Tax Act on the amount of investment. The amount of deduction can be a maximum of Rs. 1.5 lakh in a fiscal year. However, all tax-saver FDs come with a lock-in period of 5 years; hence premature withdrawal is not allowed during the lock-in period of 5 years.
However, the interest that you earn from these deposits is fully taxable and the rate of interest of a tax-saving fixed deposit varies from bank to bank. If you are looking for a low-risk saving investment option to reduce your taxable income, tax-saver FDs can be the best option out there.
Similar to a normal fixed deposit account, you will have to make a lump sum deposit in a tax-saving FD and choose the tenure as per your financial goals. Depending on the tenure of your deposit, you will receive a fixed interest throughout the tenure irrespective of any interest rate fluctuations.
However, unlike a regular fixed deposit, a tax-saving FD does not allow auto-renewal and comes with a five-year lock-in period during which no withdrawals are permitted.
Give are some noteworthy features of a typical tax-saving fixed deposit:
There is a total lock-in period of 5 years, when you cannot make premature withdrawals.
A tax-saver FD doesn't come with an auto-renewal facility.
The interest earnings are taxable and deducted at source.
It enables the account holder to reduce their yearly taxable income up to Rs. 1.5 lakh under Section 80C of the Income Tax Act#.
It can be operated in a single mode or jointly. However, in the case of a joint tax saving fixed deposit, only the first account holder will be eligible for tax deductions.
The interest rate offered remains fixed throughout the 5-year tenure.
One can choose a monthly, quarterly interest pay-out option or reinvest the interest with principal upon maturity.
Listed below are some of the advantages of investing in a tax-saving fixed deposit:
Any individual person or a member of a Hindu Undivided Family (HUF) is eligible to make an investment in a tax-saving fixed deposit. Investment can be made through any commercial bank- public or private, other than a cooperative or a rural bank. The mode of operation of such accounts can be either “single” or in a joint mode.
Please note that in the case of a 'joint' FD, only one holder- the first account holder is eligible to avail the tax benefits.
Here are the documents required for opening a tax-saving fixed deposit:
Passport
Aadhaar card
Driving license
Voter ID card
Aadhaar card
Driving licence
Passport
Utility bills
PAN card
Aadhaar card
Voter ID card
Birth certificate
The primary tax benefit available with a tax saver FD is that you can avail deductions of up to Rs. 1.5 lakh under Section 80C#. However, the interest earnings are fully taxable.
The interest earned on a tax-saving fixed deposit is fully taxable just like a regular FD and the tax is deducted at source. A 10% TDS is applicable on the interest amount if the interest earnings in a year exceed Rs. 40,000 and this limit is increased to Rs. 50,000 for senior citizens. However, if your total income falls below the minimum tax slab in such a case, you can submit Form 15G or Form 15H to prevent TDS deduction for your interest earnings.
To sum up, tax-saving deposits allow you to save taxes while earning assured returns. However, as a smart investor, you must keep certain things in mind before investing. This includes the restriction of premature withdrawal for 5 years, no overdraft facilities allowed against tax saving FD and the Rs. 1.5 lakh limit of investment amount allowed in a financial year.
No, the interest in a 5-year tax saving FD is fully taxable and deducted at source. However, you can avail a tax deduction of up to Rs. 1.5 lakh under Section 80C# on making an investment.
Yes, you can avail a tax benefit of up to Rs. 1.5 lakh u/s 80C on investing in a tax-saving fixed deposit account.
The minimum amount required to open a tax-saving FD account is Rs. 100; However, this value varies from bank to bank.
The minimum investment limit is Rs. 100 (though it varies from bank to bank) and the maximum limit is Rs. 1.5 lakh in a financial year.
If your interest income is more than Rs. 40,000 (Rs. 50,000 for senior citizens), TDS will be applicable. But in case your income is below the minimum tax slab, you can submit Form 15G (Form 15H for senior citizens) to avoid a TDS deduction from your interest income.
A tax-saving fixed deposit comes with a lock-in period of 5 years and no premature withdrawals are allowed during this period.
Upon maturity, the entire maturity value will be transferred to your linked savings account.
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# Subject to conditions specified u/s 80C of the Income tax Act, 1961.
The afore stated views are based on the current Income-tax law. Also, the customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.