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10 Things To Consider Before Investing In Tax Saving FDs


Tax saving fixed deposit is a form of deposit scheme in which, under section 80C of the Indian Income Tax Act, 1961, you can get tax benefits. Which implies that one can claim a deduction of up to Rs 1.5 lakh on the investment amount deposited in a tax saving fixed deposit scheme. Also, in the event of their death, investors can nominate someone to withdraw the deposit balance before or after maturity. A plethora of tax saving investment options, like ELSS, PPF, NPS, tax-saving fixed deposit and NSC, are available in markets that allow investors to generate wealth.

Tax-saving fixed deposits (FDs) are known to be one of the best investment strategies among these. The amount deposited is totally secured and the returns are assured as well. These deposits have a lock-in term of 5 years and the tax-saving FD interest rates usually range from 5 percent to 6.3 percent as of now. The interest earned from these sorts of FD schemes, though, is taxable. If you have not yet explored any tax-saving strategies and need a simple and quick bet for tax benefits, then the perfect match for you might be a tax-saving fixed deposit. Let's find the more benefits of a tax saving FD scheme.

Key takeaways of tax saving fixed deposits

Key takeaways of tax saving fixed deposits

  • One of the most common investment vehicles to reap tax benefits under section 80C of the Income Tax Act.
  • Along with tax benefits one can also get assured returns
  • One can start investing by making a minimum deposit of Rs 1000 up to a limit of Rs. 1,50,000 (The minimum deposit cap may vary from bank to bank).
  • Tax saving FDs comes with a tenure of 5 to 10 years
  • One can also make use of a nomination facility available under tax saving FD schemes.
All you need to know about tax saving fixed deposits

All you need to know about tax saving fixed deposits

Here are a couple of facts to remember before you plan to make a tax-saving FD investment:

1. Only individuals and HUFs are entitled to invest in fixed deposit(FD) plans for tax benefits. A minor can, however, jointly invest with an adult as well.

2. It is possible to open tax-saving fixed deposits with a minimum deposit amount that ranges from bank to bank. In a financial year, which is also the ceiling for tax-saving investments under section 80C of the Income Tax Act, the maximum amount is set at Rs. 1.5 lakh.

3. Tax saving fixed deposits comes with a minimum lock-in period of 5 years and does not allow premature withdrawal and loan facilities.

4. Investment in tax saving FDs can be made online and offline at any public or private sector bank, except cooperative and rural banks.

5. Interest on tax-saving deposits is payable on a monthly or quarterly basis. If the investor decides to, the interest amount received can also be reinvested.

6. In the case of joint accounts, only the first holder is entitled under Section 80C of the Income Tax Act for tax deduction.

7. As per the investor's tax bracket, the interest received is subject to TDS. By submitting Form 15G (or Form 15H for senior citizens) to the bank, TDS can be avoided. For individuals, if the gross interest received crosses Rs 40,000 in a financial year with no adjustment in the taxation of interest income, TDS is applicable. A deduction of up to Rs 50,000 on the interest received from deposits under section 80TTB can be claimed by senior citizens.

8. Tax saving FDs also comes with a nomination facility as we talked above. However, in the event of a deposit being submitted and maintained by or on behalf of a minor, the nomination facility is not available.

9. Almost all the banks provide senior citizens with a significantly higher interest rate on fixed deposits relative to the interest rate provided to the general public on the same FD scheme. For tax saving FDs, this interest rate gap even exists.

10. One of the key distinctions between regular fixed deposits (FDs) and tax-saving deposits is that it is possible to redeem the former before maturity, although the latter can not be withdrawn before five years of lock-in period.

Cons of investing in tax saving fixed deposits

Cons of investing in tax saving fixed deposits

Apart from considering the benefits of investing in tax saving FDs one must also look at the cons too which are as follows:

1. The fact that the interest is completely taxable is one of the main drawbacks of the tax saver FD. Thus, the PPF, government bonds, and ELSS do not trigger tax on returns as the tax saving FDs do.

2. As opposed to the Equity Linked Saving Scheme and various post office tax saving schemes such as Post Office Time Deposit where the lock-in period is less i.e. 1,2,3 and 5 years, tax saving fixed deposits comes with a lock-in period of 5 years which is another downside.

3. These fixed deposits do not fall with the strongest interest rates available. Various post office tax saving schemes such as the Public Provident Fund, for example, offer an interest rate of 7.1 percent, SSY with an interest rate of 7.6 percent and SCSS with an interest rate of 7.4 percent, whereas just only 6.3 percent of the highest interest rates on tax saver FD is currently provided by ICICI Bank.

Read more about: fd fds fixed deposits
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