A Fixed Deposit, or tax saving FD, is a financial investment instrument that banks and NBFCs offer. It allows you to deposit money and receive a higher interest rate than a savings account. Section 80C exempts investments made under this scheme from tax deductions. While a regular FD might offer higher returns, it does not provide tax benefits.
Let’s learn all about tax-saving fixed deposits. We will also discuss their benefits and how to invest.
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Tax Savings FD
A tax saving FD (tax-saving fixed deposit) is a type that allows an individual to claim a tax deduction according to Section 80C of Indian Income Tax, 1961. You can make these deposits through either a single holder type deposit or a joint holder type deposit.
Joint holding is not available. The maturity period for the tax saver fixed-deposit is five years. Individuals and the Hindu Undivided Family can deduct under section 80C.
What is a Tax Savings FD?
This is a brief overview of how a tax-saving FD works.
- This is a financial arrangement offered by banks and other NBFCs. It allows you to deposit a lump sum of money over a set period or tenure.
- A fixed deposit that is tax-saving can be held for 5 years.
- It allows for a tax deduction according to Section 80C of 1961’s Income Tax Act.
- You cannot withdraw from the contract before it expires.
- Interest earned on deposits is taxable
- The maturity amount of a tax-saving FD is credited to the savings account associated with the FD at the time it matures.
The Key Features of a Tax Savings FD
You can accumulate sufficient funds by investing in a tax-saving FD. You get tax benefits as well as good returns. These are the main features of a tax-saving FD:
- Exemption from Tax
You can get income tax exemption under Section 80C, IT Act, 1961, if you have a tax saving FD. This exemption can be claimed for investments up to Rs 1.5 lakh
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- Lock-in Period
Fixed deposits that are tax-saving have a lock-in period for five years. Over the five-year period, interest rates remain unchanged.
- Taxable interest
As part of the Tax Saving FD the interest earned is taxable. It is deducted at source.
- No premature withdrawals
Regular FDs offer loan facilities to depositors. A Tax Saving FD does not allow for premature withdrawals, overdraft (OD), and loan facilities.
- No Auto-Renewal Option
A Tax Saving Fixed Deposit cannot be renewed automatically.
- Flexible Interest Pay-outs
A tax-saving FD allows you to choose when and how much interest you receive. You can choose to receive monthly or quarterly payments or reinvest the principal amount.
- Other Features
Rates for Indian citizens and Hindu Undivided Familie (HUF) vary from one bank to the next. You can have a Tax Saving Fixed Deposit in either a single or joint account. Tax benefits will only be available to the account holder who holds the joint Tax Saving Fixed Deposit.
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Benefits of a Tax Savings FD
Tax saving FDs are a safe investment option with many benefits. These are just a few of the many benefits offered by this scheme:
- High Returns
Fixed deposits that are tax-saving have a higher potential to earn interest than savings accounts.
- Lump Sum Deposit
You can deposit a lump sum amount with a tax-saving FD. This is an excellent feature for those who have substantial surplus savings.
- Minimum Lock-in Period
Five years is the minimum term for tax benefits. It can, however, be extended for a shorter tenure.
An FD that saves taxes is completely secure. Market fluctuations do not affect interest rates as with Mutual Funds or other market-related investments. The maturity date for tax-saving FD interest rates is also fixed.
- Flexible Deposit Maximum
Flexible deposit amounts can be offered by FDs based on investor convenience.
- Tax Benefits
How can you avoid tax deduction on FD?
These are some ways to avoid TDS on FDs.
- By submitting Form 15G/15H
The bank will not deduct TDS on interest earned if you submit Form 15G, stating that there is no taxable income. Senior citizens need to fill out Form 15H.
- Timing of the FD
Tax deduction can be avoided by timing your FD so that the interest earned for any given financial year is less than Rs 10,000
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- Splitting the FD
Tax deductions on FD can be avoided by opening one FD under your bank account and one under your HUF account. Both will be treated separately.