How Can Tax Saving Fixed Deposits Help You Save on Taxes?

How Can Tax Saving Fixed Deposits Help You Save Tax?

Tax planning is important for your personal finance management. One effective tool to reduce your tax liability is by investing in Tax Saving Fixed Deposits (FDs). Tax Saving FDs are a reliable investment option that offers tax benefits that depositors can claim under Section 80C of the Income Tax Act. In this blog, let us explore how a Fixed Deposit scheme can help you save on taxes and optimise your overall finances. 

Why invest in Tax Saving FDs?

Tax Saving FDs is a specified category of Fixed Deposits They come with a lock-in period of 5 years and a fixed interest rate. 

Tax Saving FDs are offered by regulated financial institutions. They are backed by deposit insurance provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC) that covers each depositor up to Rs 5 lakh in case of bank failure. This ensures the safety of your investment principal. 

How much money do you need to invest in a Tax Saving FD to save Rs 1,50,000 a year on taxes?

To save Rs 1,50,000 a year on taxes through a Tax Saving FD you need to invest up to the maximum allowable deduction of Rs 1,50,000 per financial year.

This means that by investing Rs 1,50,000 in a Tax Saving FD, you can claim the entire investment as a deduction from your taxable income. After 5 years, when you can withdraw it, along with the interest earned.

The tax deduction reduces your taxable income and the actual tax savings will vary based on the tax rate applicable to your income bracket.

Consulting a tax professional or financial advisor can help you make the most of your money. 

Benefits of Tax Saving FDs

1. Guaranteed Returns:

   During the lock-in period of 5 years, you cannot withdraw the funds from the FD. This guarantees the investment remains intact and eligible for tax benefits

2. Easy to Open and Manage:

   Tax Saving FDs are easy to open and manage, especially if you already have a banking relationship. For instance, if you are an ICICI Bank customer, you can open a Tax Saving FD through the Internet Banking portal or use your iMobile App. You can also visit your nearest ICICI Bank Branch

3. Interest Rates and Returns:

   The Fixed Deposit Interest Rates offered on Tax Saving FDs by ICICI Bank are competitive especially for senior citizens. However it is always good to compare rates across different banks for making a more informed decision.

Few Considerations -

• Risk vs. Returns:

  While Tax Saving FDs may not provide high returns, they do offer guaranteed returns and tax savings.

• Devise a Tax Saving Strategy:

  Tax Saving FDs should be a part of a more comprehensive tax planning strategy. Consider other tax saving options such as Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), Public Provident Fund (PPF) and Life Insurance policies to diversify your investments and maximise tax benefits.

• Tax Implications on Interest:

  While the investment amount in Tax Saving FDs is eligible for a tax deduction, the interest earned is taxable as per your applicable income tax slab. Keep this in mind when calculating the overall tax impact.

• Liquidity Considerations:

  Since there is a lock-in period, ensure that you have sufficient liquidity for your short-term financial needs before investing in a Tax Saving FDs.

• Assess Your Financial Goals:

  Before investing in Tax Saving FDs, evaluate your financial goals and time horizon. Consider the liquidity requirements, risk tolerance and the potential impact on your overall investment portfolio.

You can open an ICICI Bank Tax Saving FD through a minimum investment of Rs 10,000 and a maximum of Rs 1,50,000 for a duration of 5 years.