What Are The Disadvantages Of A Tax Saver FD?

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It is one the busiest periods for people, planning a choice of tax saving instruments. In fact, it is the time to choose the right tax savings under Sec 80C of the Income Tax Act.

You have a plethora of choices by which you can save tax under Sec 80C.

What Are The Disadvantages Of A Tax Saver FD?
The maximum amount that would be eligible for tax benefit would be Rs 1.5 lakhs. You can choose from a long list including the likes of Public Provident Fund (PPF), Tax Saving Bank Fixed Deposits, ULIPs, Equity Linked Saving Schemes or ELSS etc.

We will specifically discuss the disadvantages of tax saver FD vis-a-vis other instruments.

1. Interest income is taxable

One of the biggest disadvantages of the tax saver FD is that the interest is fully taxable. So, while a PPF and ULIP does not attract tax on the returns, the tax saving fixed deposit would.

2. Lock-in of 5 years

Another disadvantage is that the lock-in is of 5 years, as compared to the Equity Linked Saving Scheme, where the lock-in is only 3 years. However, it compares very favourably with the PPF, where the lock-in is almost 7 years.

3. Interest rates are not the best

The interest rates in these fixed deposits are not the best around. For example, the Public Provident Fund offers an interest rate of as much as 8.7 per cent, while the best rates of interest from a bank tax saver FD would be around 8 per cent.

There are some other things that the tax saver FD does not offer. For example, they do not come with an insurance component like Unit Linked Insurance Plans do.

Conclusion

Tax saver bank fixed deposits offer numerous advantages like they are rather safe and the interest and returns are pre-determined. Also, many individuals have greater comfort dealing with banks rather than other institutions. This makes the tax saver FD one of the good bets in India.

GoodReturns.in

Read more about: elss, ppf
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