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Tax-Saving Fixed Deposit: A Comprehensive Overview for Savvy Taxpayers


Tax-Saving Fixed Deposit: A Comprehensive Overview for Savvy Taxpayers

There are various types of fixed deposit accounts available to assist people and organisations in setting money aside for the future. You can select the account tenure for general FD accounts according to your convenience. Apart from standard FD accounts, numerous banks provide a five-year FD plan designed to save taxes. By depositing money in a five-year FD programme, one can claim an income tax deduction under Section 80C of the Income Tax Act, 1961. It's possible that this kind of account's conditions, features, and advantages differ slightly from those of traditional FD accounts. To take advantage of the advantages, there are several things you should be aware of regarding these FD accounts.

 

Table of Contents

 

What is a Tax-Saving Fixed Deposit?

A kind of fixed deposit account that provides a tax deduction under Section 80C of the Income Tax Act, 1961 is a tax-saving fixed deposit (FD) account. Any investor who funds a tax-saving fixed deposit account is eligible to deduct up to Rs. 1.5 lakh annually. Among its attributes are: 

  • Five-year lock-in period

  • Earned interest is subject to taxation

  • The interest rate is between 5.5% and 7.75%

Both individuals and Hindu Undivided Families (HUFs) may invest in tax-saving FDs. With the exception of cooperative and rural banks, you can invest in a tax-saving FD through any public or private bank. A person may own "single" or "joint" tax-saving FDs. When using the "Joint" method, tax benefits are solely available to the initial holder.

Essential Documents for Tax-Saving Fixed Deposits

  • Identity Proof: PAN, Voter ID, Aadhaar, Driving License, Senior Citizen card, Passport, etc.

  • Address Proof: Passport, Bank Statement with Cheque, Telephone/Electricity Bill, etc.


Features & Benefits of a Tax-Saving Fixed Deposit

When it comes to savings, the general public has always had complete faith in fixed deposit accounts as a financial tool. Investors are reassured of its low-risk and safe nature because it is a bank-based investment product that is regularly supervised by the RBI. Upon maturity, the money deposited can also be easily redeemed with interest. The features and advantages of FDs are listed below:

Features:

  • Exemption from taxes: Section 80C of the IT Act, 1961 allows you to take advantage of income tax exemption with a tax-saving FD. Up to Rs 1.5 lakh in investment is required to claim it.

  • Lock-in period: There is a five-year lock-in period on tax-saving fixed deposits. For the whole five-year term, the interest rates also stay the same. 

  • Taxable interest: As part of the Tax Saving FD, interest is earned and subject to source deductions. 

  • No early withdrawals: Loan facilities are provided by a regular FD against deposits. On the other hand, a Tax Saving FD does not offer lending facilities, overdraft (OD), or premature withdrawals. 

  • No option for auto-renewal: An Automatic Renewal feature is not available for Tax Saving Fixed Deposits. 

  • Flexible interest payouts: You can choose when you would like to get interest payouts under a tax-saving FD. You have the option to reinvest the principal amount or get payouts on a monthly or quarterly basis.


Benefits:

  • Elevated profits: Compared to savings accounts, a tax-saving fixed deposit provides a larger potential for interest income.

  • One-time payment: You can make a one-time lump sum deposit with a tax-saving FD. If you have a significant amount of extra savings, it is a useful function. 

  • Minimum time needed to lock in: Five years is the minimum duration required to receive tax benefits. It can, however, be prolonged for a longer period of time. 

  • Safety: An FD that saves taxes is completely safe. Unlike mutual funds and other market-related investing options, there are no market changes that impact interest rates. Until the investment matures, the tax-saving FD interest rates are likewise fixed. 

  • Flexible deposit amount: FDs provide for deposit amount flexibility based on investor convenience.

  • Tax advantages: Under Section 80C of the Income Tax Act of 1961, you are eligible for income tax deductions of up to Rs. 1,50,000 annually.


Who Should Invest in a Tax-Saving Fixed Deposit?

You should take your age, risk tolerance, and investment horizon into account before choosing any investment option. Here are the circumstances that make tax-saving fixed deposits an ideal investment:

  • You have a low to zero tolerance for risk and are almost at retirement age: You would be better off with a Tax Saving FD because it offers low risk and assured earnings. The Tax Saving FD interest rates are available for comparison; select the one that best meets your investment needs.

  • You want to reduce your taxes. To avoid paying taxes, you can apply for a Section 80 C fixed deposit income tax exemption.


Comparison of Tax-Saving Fixed Deposit with Other Tax-Saving Investments

In addition to FDs, a plethora of other tax-saving investment options exist to assist you in building wealth, including PPF, NSC, and ELSS tax-saving mutual funds. One of the safest savings alternatives available is a fixed deposit, which provides growth and capital protection without being impacted by market highs and lows. The scheme's returns are subject to taxes, though. Here is when ELSS's twofold advantage—generally higher returns that are tax-free—comes into play. This makes investing in ELSS currently much more compelling, especially considering the short lock-in period of just three years. Conversely, because ELSS is dependent on the market, there is some risk involved. A Tax Saving Fixed Deposit requires a minimum investment of Rs 10,000. The minimum investment required for a PPF account is Rs 500, although you can start one with an opening balance of Rs 500. A PPF has a 15-year lock-in term as well.


Conclusion

A fixed deposit is the best alternative if you're seeking an investment that meets the requirements of growth, minimal risk, and guaranteed returns. An even better option is a Tax Saving FD, which helps you claim an income tax exemption on Fixed Deposits up to Rs 1.5 lakh under Section 80 C of the IT Act. A five-year lock-in term and a minimum investment requirement of Rs 10,000 are associated with Tax Saving Fixed Deposits. You can invest your money safely and securely by researching interest rates for Tax Saving FD schemes.


FAQ

Q1. How can I open a tax-saving FD? 

It's incredibly simple to invest in a tax-saving fixed deposit. An account can be opened in person at a bank branch or online. It is advisable to examine interest rates offered by several banks on tax-saving FDs before making an investment.

Q2. What are notable facts about the tax-saving FD interest rates?

The fixed interest rate on tax-saving fixed deposits doesn't change during its five-year term. Interest rates for NRIs, HUFs, and Indian nationals differ from bank to bank and are frequently adjusted. Higher interest rates are available to bank employees and seniors. The interest must be added to your income, is taxed, and is withheld at the source.

Q3. What is the tax-saving FD investment limit?

A tax-saving fixed deposit allows for a minimum investment of Rs 100 and a maximum investment of Rs 1.5 lakh every financial year.

Q4. What is the tenure of a tax-saving FD?

Fixed deposits that save taxes have a five-year lock-in term. There are no overdraft options, loans, or early withdrawals allowed against tax-saving FDs.

Q5. How much tax deduction is allowed with tax-saving FDs?

Under Section 80CCD(1), salaried workers are eligible to deduct up to Rs 1.5 lakh for their personal contributions made to the NPS account.

Q6. What are the tax benefits for joint holders of tax-saving FDs?

A maximum of Rs 1.5 lakh in income tax deductions are available to individual account holders per financial year. This tax benefit is only accessible to the primary account holder in a joint account. The advantage is not transferable to the other account holders.

Q7. Is there any risk in tax-saving FD?

Fixed deposits that save taxes come with no risk at all. Both the returns and the invested money are guaranteed, and the former is fully safeguarded. 

Q8. What happens when tax-saving FD matures?

Upon the expiration of the fixed deposit term, the funds are credited to your source account. 

Q9. What is the interest rate on a tax-saving fixed deposit in HDFC? 

For normal residents, HDFC Bank offers a 5-year Tax Saver FD Scheme at an interest rate of 7.00% p.a., and for senior citizens, 7.50% p.a.

Q10. What is the interest rate on tax-saving fixed deposits in ICICI? 

ICICI Bank provides a tax-saving fixed deposit with interest rates of 7.50% for senior people and 7% for general citizens. A Tax Saver FD can have a minimum deposit of Rs 10,000 and a maximum deposit of Rs 1,50,000. The current fiscal year's tax-saving season is coming to an end.

Q11. What is the interest rate on tax-saving fixed deposits in SBI? 

For the general public, the interest rate on SBI Tax Saving FD is 6.50% annually, but for senior citizen depositors, it is 7.50% annually.

Q12. What is the interest rate on tax-saving fixed deposits in the Post Office? 

The Indian government's sovereign guarantee supports these post office savings accounts. The post office offers fixed-rate loans with interest rates ranging from 6.90% to 7.50% annually for terms of one to five years. Up to a 7.50% annual interest rate is offered by the Post Office FD on tax-saving FD.

Q13. What is a tax-saving fixed deposit calculator?

The interest and total amount that will accrue at the time of maturity can be found using an FD calculator. It's an easy-to-use online tool.

Q14. What is the maximum investment limit for tax-saving fixed deposits, and can it be extended beyond the specified period?

The maximum investment limit for tax-saving fixed deposits is determined by the provisions of Section 80C of the Income Tax Act, which currently allows deductions up to Rs. 1.5 lakh per financial year.

Tax-saving fixed deposits usually have a lock-in period of five years, which cannot be extended beyond this period. However, investors can open new fixed deposits to continue availing tax benefits beyond the initial term.

Q15. Are tax-saving fixed deposits subject to TDS (Tax Deducted at Source)?

Yes, tax-saving fixed deposits are subject to TDS if the interest income exceeds Rs. 10,000 in a financial year. The applicable TDS rate is 10% if PAN is furnished; otherwise, it is charged at 20%.

Q16. What are the tax implications upon maturity of a tax-saving fixed deposit, and how is the interest income taxed?

Upon maturity of a tax-saving fixed deposit, the interest income is fully taxable as per the individual's income tax slab rates.The interest income is added to the individual's total income for the financial year in which the fixed deposit matures, and tax is levied accordingly.


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