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Tax-Saving Fixed Deposit: Meaning, Features & Benefits

Choosing a tax-saving Fixed Deposit under 80C is a smart choice for individuals seeking tax benefits and a secure investment with guaranteed returns.

  • 3,641 Views | Updated on: Jun 25, 2024

Considering tax-saving tactics is essential when deciding how to allocate resources and manage finances. Tax-saving fixed deposits are currently the preferred choice for low-risk investors out of many investment options. In addition to ensuring significant profits, these particular fixed deposits also provide a favorable tax deduction under Section 80C of the Indian Income Tax Act, 1961.

Investors who already invest in a tax-saving Fixed Deposit can thus effectively cut down on their tax outgo while at the same time ensuring that their savings are growing at a steady pace. Whether you are a beginner in investing or just an experienced saver, it is crucial to know what is tax-saving Fixed Deposit to make better choices and improve your savings strategy.

What is a Tax-saving Fixed Deposit under Section 80C Deduction?

A tax-saving FD is a specific form of financial tool developed to allow citizens to minimize their tax amounts while earning predetermined interest upon investments. As per Section 80C of the Income Tax, the account holders can avail the deductions on the amount invested on these FDs up to a limit of ₹1. 5 lakh per fiscal year for managing the organization and handling all the related issues effectively. However, one important feature of tax-saving FDs is that they have certain restrictions on their maturity period, which usually cannot be less than five years. In this period, one cannot withdraw before a specified period.

Although the amount that one pays can be claimed as a tax deduction, the interest that is earned on these deposits is all fully taxable. Nevertheless, tax-saving Fixed Deposits continue to be favored among conservative investors, who are willing to lock in their money for a certain period of time and get regulated returns with added tax advantages.

How Does a Tax-saving Fixed Deposit Work?

A tax-saving fixed deposit works like any other fixed deposit account, whereby the investor deposits a lump sum for a specific period of time. The depositor gets a predetermined rate for a given period in the deposit to avoid being affected by changes in the rates of interest. Another feature of the tax-saving fixed deposit plans is that they cannot be renewed automatically like the normal fixed deposit schemes. They are accompanied by a five-year lock-in period, withdrawal of which is not allowed before the prescribed period elapses. This lock-in period enables the investor to focus on a particular investment for longer years.

Top Features of a Tax-Saving FD

Investing in a tax-saving Fixed Deposit offers several advantages, making it a popular choice for individuals seeking to grow their savings while minimizing tax liabilities. Here are the top features of a tax-saving Fixed Deposit:

Tax Exemption

This investment tool acts as a tax-saving means that can help you save tax under Section 80C of the IT Act, 1961. You can claim this exemption on investments of up to ₹1.5 lakh, reducing your taxable income.

Lock-in Period

The Fixed Deposit helps an individual save tax, and the lock-in period for this account type is 5 years. At this time, the interest rates are fixed, which offers serene markets and definite returns for the investors.

Taxable Interest

The actual investment amount is tax-free, but the interest obtained from a tax-saving Fixed Deposit is considered taxable and attracts TDS – Tax Deducted at Source.

No Premature Withdrawals

This means that, unlike a normal FD where premature withdrawal, overdraft, or loan facilities are allowed, it is not permissible in a tax-saving Fixed Deposit. This guarantees a person’s commitment to saving in the long run.

No Auto-renewal Option

The Fixed Deposit does not have an auto-renewal facility. When futures are due, investors are required to be more active in making the investments they want to undertake.

Flexible Interest Pay-outs

Income tax saving Fixed Deposits provide convenience in terms of periodical payments of the interest amount. Interest can be paid as dividends on a monthly or a quarterly basis or, as many investors opt for, have it rolled and added to the principal amount to earn even higher interest.

Additional Features

The interest rates may also differ from one bank to another and the rates applicable for the Indian citizens or Hindu Undivided Families (HUF) may not be the same. Tax-saving Fixed Deposits come in single or joint forms, taxation provisions relating to the same will be permitted only to the first joint account holder.

How to Avoid Tax Deduction on FD?

FDs are one of the most trusted investment tools because of their security and guaranteed interest rate returns, but the interest income received on FDs is taxable to a certain extent. Here are some strategies to avoid tax deductions on FDs:

Submission of Form 15G or 15H

By submitting Form 15G (for individuals) or Form 15H (for senior citizens), you declare that you have no taxable income for the relevant financial year. This exempts you from TDS deductions on the interest earned.

Strategic FD Timing

It is always advisable to time your Fixed Deposits in such a way that would help avoid getting into tax deductions. To avoid TDS deductions, it is wise to ensure that any interest accrued in a financial year does not exceed ₹40,000 (₹50,000 in the case of senior citizens).

FD Splitting

Another way of getting out cheap is by having a split investment in FD to have a good tax strategy. Open one Fixed Deposit under your own account number and another under someone of the Hindu Undivided Family (HUF) member account number. This ensures that both FDs are considered separately for tax purposes, which may help minimize one total tax bill.

How to Claim FD Deduction Under Section 80C?

To claim FD deduction under Section 80C:

  • Ensure a minimum tenure of five years for the FD.
  • Register your PAN with the bank.
  • Abide by the five-year lock-in period for Tax Saver FDs.
  • Report the investment amount in your tax return.
  • Keep FD-related documents for tax assessment.
  • Consider consulting a tax advisor for personalized guidance.

Documents Required to Invest in Tax-savings Fixed Deposit

Opening a tax-saving FD under 80C requires specific documentation to ensure compliance with regulatory requirements. Here Is a list of essential documents you will need:

Government-recognized ID Proof

You will need to provide a valid government-recognized identification document. Accepted forms of ID include:

  • Aadhaar Card
  • Driving License
  • Passport
  • Ration Card
  • Voter ID Card
  • Government-Recognized Address Proof
  • Proof of Age (for Senior Citizens)
  • Two Recent Colour Passport-Size Photographs

Taxation on FD Earnings

Taxation on interest earned from Fixed Deposits is an important aspect of financial planning, especially when exploring tax-saving investments such as tax-saver FDs. Below is a detailed examination of the tax rules governing interest earned on Fixed Deposits:

Tax Benefits

Investing in a tax-saver FD offers a major advantage of receiving a tax benefit of up to ₹1.5 lakh as per Section 80C of the Income Tax Act. This implies that investors can subtract the amount they invested from their taxable income, resulting in a tax-free investment.

Taxation of Interest Earnings

While there is a tax benefit on the initial amount put into a tax-saving Fixed Deposit, any interest gained from the investment is subject to full taxation. Just like with normal FDs, the interest earned is considered taxable income and is subject to deduction at source (TDS).

If the interest earned during a specific financial year is more than ₹40,000, a 10% TDS must be paid on the interest earned. In the case of senior citizens, this threshold is increased to ₹50,000. Nonetheless, individuals with income below the specified limit for tax deductions can complete Form 15G or 15H to prevent TDS on their interest earnings.

Considerations for Investors

When choosing tax-saving deposits, one must consider certain factors. This consists of the five-year restriction on withdrawals, preventing early access to funds, and the lack of overdraft options for tax-saving Fixed Deposits. Investors also need to be cautious about the ₹1.5 lakh maximum investment limit permitted in a financial year as per Income Tax Section 80C.

Key Takeaways

  • Tax-saving FDs are an investment product that helps you to earn guaranteed returns and enable you to take advantage of Section 80 C and save up to ₹1.5 lakh per year.
  • These deposits attract a five-year fixed term which means your money will grow beyond the normal fiscal year.
  • The principal amount invested in a tax-saving FD is tax-exempt, but the interest earned on such a deposit is fully taxable and liable to TDS.
  • Recall investors have the option to receive interest payments either on a monthly or annual basis or have the interest amount reinvested for compounding.

Conclusion

Tax Saving Fixed Deposit is recommended for investors looking to save taxes while receiving a guaranteed rate of return. Investing ₹1.5 lakh in a tax-saving Fixed Deposit under section 80C of the Income Tax Act allows for deductions. These FDs have a five-year lock-in period to discourage impulsive financial decisions. By submitting Form 15G or 15H, one can avail themselves of tax exemption on interest earned, but the earned income is still taxable. Knowing the ins and outs of tax-saving Fixed Deposits can enhance financial planning and offer a valuable investment option.

FAQs on Tax-saving Fixed Deposit

1

How does a tax-saving FD differ from a regular FD?

The tax-saving Fixed Deposits under Section 80C are tax savers in nature, whereas normal Fixed Deposits do not have tax deductions.

2

How much tax can I save by investing in a tax-saving FD?

You can save up to ₹1. 5 lakh in taxes by investing in a tax-saving Fixed Deposit which comes under Section 80C.

3

What is the lock-in period for a tax-saving FD?

Income-tax Fixed Deposits have a maturity period of five years, and the facility to withdraw the amount from the FD prematurely is not available.

4

Can I take a loan against my tax-saving FD?

No, loans against tax-saving Fixed Deposits are not permitted.

5

Are there any special benefits for senior citizens in tax-saving FDs?

Yes, senior citizens enjoy a higher threshold of ₹50,000 for TDS exemption on interest earnings.

6

Can NRIs invest in Tax-Saving FDs?

NRIs are eligible to invest in Tax-Saving Fixed Deposits subject to certain conditions and regulations.

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.