Under Section 80C of the Income Tax Act, a fixed deposit in a bank for a term of five years eligible for tax benefits. However, the tax-benefits will only be applicable if the specified deposits made in the tax-saving fixed deposits (FD) of the 5-year term. The average interest rate on 5-year tax saving FD is currently in the range of 5.25 per cent to 6 per cent in most major banks. And an additional interest rate of 0.5 per cent is provided to senior citizens on the amount deposited in the tax-saving fixed deposits. But on the other side, 5-year National Savings Certificate (NSC) post office offers 6.8 per cent interest annually and equivalent tax benefits are also provided. So let's figure out which investment option is going to be the ideal partner for a tax-saver in India.
Tax Saving FDs
You can opt any private, public sector or Small Finance bank in India to reap tax benefits by participating in the 5-year tax-saving bank's fixed deposit. You can invest in a tax-saving FD by visiting any nearest bank or via net banking. The investment begins immediately in the online method and the certificate is instantly provided to allow one to gain from the same tax benefit. But before going for an online method make sure that your PAN is linked to your savings account so that the maturity amount will be credited directly to your bank account along with the tax-benefits.
One can invest up to a maximum of Rs 1.5 lakh annually in the 5-year tax-saving bank fixed deposit to reap the tax benefits. But it is essential to keep in mind that such types of deposits are not allowed for partial or premature withdrawal, loan facility and also the lock-in period is 5 years according to the guidelines. Tax-saving FDs come with monthly or quarterly interest payouts and one can even choose for the cumulative option. Both single and joint accounts can be opened under tax-saving FDs but only the primary or first holder is allowed to cherish tax benefits.
Post Office National Savings Certificate (NSC)
Interest rates by a bank for tax-saving FD may adjust at any time, but in the case of post office schemes, like NSC, the rates are fixed at the beginning of each quarter of every FY by the government. But however, the rate remains fixed for the entire tenure for this tax-saver schemes. Hence, the interest earned is fully taxable on the investment made in both of these tax savers. In NSC, the compounding is done on an annual basis as compared to FD. The interest received annually by a subscriber in NSC is considered to be disbursed for initial 4 years under Section 80C of the I-T Act which makes NSC out of the box if compared to any other fixed income tax saving option.
Experts suggested that do not only go for interest rate while opting between a 5-year Tax Saving Bank Fixed Deposit and NSC. Both of these fixed-income tax-saving investment options come with tax benefits and hence deem them only after you have looked at your income slab as their post-tax return is low.