Investing early in life is always a good idea, and so is tax-planning.
Tax saving Fixed Deposits are nothing but fixed-income instruments which allow tax deduction. By investing in such deposits, you can claim deduction under section 80C of the Income Tax Act, 1961.
You can claim a maximum deduction of Rupees 1.5 lakhs from total gross income by investing in such deposits.
- Lock-in Period: You can invest in these fixed deposits if you have a medium-term investment horizon. They have a lock-in period of 5 years
- Taxable Interest: Interest earned on these FDs is eligible for tax as per investor’s tax bracket
- Minimum Amount: You need to invest a minimum of Rs. 1000 / Rs. 5,000 (varies from Bank to Bank) in tax saving FDs
- Returns: The rate of interest earned on such tax-saving FDs typically ranges from 6.5%-8.5% currently across all categories of investors
- Secure: Tax saving fixed deposits are safe investments similar to regular fixed deposits
- Tax Deductible: Amounts invested in these deposits are eligible for a total tax deduction of up to Rs. 1.5 lakh in one financial year.
- Tax saving FDs offer higher interest rates compared to a savings bank account and certain traditional fixed income avenues.
- Low-risk in nature as it is not market-linked.
- Eligible for tax-deduction under Section 80C up to an amount of Rs. 1,50,000.
- Flexibility in the investment in multiples of Rs 1, unlike other tax saving investment options.
How to invest in tax saving fixed deposits?
All banks offer Fixed Deposits that save tax. However, interest rates vary from one bank to another. Investors should compare interest rates offered across various banks and apply taking into consideration overall safety, returns and the services provided by the bank.
Frequently Asked Questions:
- 1. Who should invest in a Fixed Deposit that saves tax?
Ans: Anyone looking for guaranteed returns at low risk for medium-term investment horizon could consider investing in tax saving FDs.
- Is investing in tax-saving funds risky?
Ans: On the contrary, investing in tax saving fixed deposits is relatively risk-free (deposits up to Rs. 1 lac are insured in case of bank failure). They offer guaranteed returns at the end of the tenure.
- What are the returns on tax saving FD?
Ans: The returns are fixed over the five-year tenure and vary from bank to bank. The rate of return also varies based on the kind of investor – individual, HUF, Senior Citizens, or NRIs. The interest is taxable and is often deducted at source on crossing a particular threshold unless Form 15 G/ Form 15H is submitted.
- What is the minimum amount to invest in tax saving FD?
Ans: The minimum threshold of investing in such deposits varies. You can start with as low as Rs. 1,000. The maximum limit, on the other hand, is Rs. 1.5 lakhs in a year.
- Who can invest in these Fixed Deposits?
Ans: Individuals, NRIs, Senior Citizens or HUFs are eligible to invest.
- What happens on maturity of tax saving fixed deposits?
Ans: On maturity, the principal amount plus the interest less the tax deducted is credited back to investors’ linked bank account.
- What are the tax benefits on such instruments?
Ans: The entire amount invested in these fixed deposits in that financial year is deductible from the taxable income of up to Rs. 1.5 lakhs. However, if the FD is jointly held, tax benefits can be claimed by the first holder only.
- What is the tenure of such deposits?
Ans: These fixed deposits have a minimum tenure or lock-in period of 5 years. Such deposits do not allow premature withdrawals or loans against such deposits.
Hence, investing in tax saving fixed deposits can be beneficial to those looking for guaranteed returns with low risk and tax benefits.
To know how Tax Saver Mutual Funds stack against Tax Saver Deposits click here.
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