What is a Tax Saving Fixed Deposit (FD)?

February 24, 2021

What is a Tax Saving Fixed Deposit (FD)?

Fixed Deposit is an investment option that is provided by banks and Non-Banking Financial Companies (NBFCs) to facilitate the expansion of your wealth safely and securely. If you are interested in fixed deposits as an option for saving taxes, opt for a Tax Saver FD and benefit from Fixed Deposit income tax exemption. You can compare Tax Saving FD interest rates before investing.

How Does A Fixed Deposit Work?

You need to deposit a lump sum amount for a fixed tenure that suits your requirement. Your investment gets a locked-in interest rate and the same is applied, irrespective of any interest rate fluctuations in the future.

Fixed Deposits are not exposed to market volatility and are considered safe. You can also choose to renew your Fixed Deposit in case of non-withdrawal at the time of maturity.

Fixed Deposits are preferred over regular savings bank account as they offer higher returns on your principal. What’s more? There are special Fixed Deposit schemes for senior citizens offered by banks and Non-Banking Financial Companies (NBFCs), wherein higher interest rates are provided, over and above the existing ones.

Some key features of a Tax Saving FD are:

  • A tax saving FD lets you avail of income tax exemption under Section 80C of the IT Act, 1961. The Fixed Deposit income tax exemption can be claimed on investment of up to Rs 1.5 lakh
  • The lock-in period is five years
  • The interest earned, as a part of the Tax Saving Fixed Deposit, is taxable, and is deducted at source
  • Premature withdrawals, Loans or Overdraft (OD) facilities are not available for a Tax Saving FD. Regular Fixed Deposits offer loan facility against deposits
  • There is no auto-renewal facility for Tax Saving Fixed Deposits
  • Interest pay outs are flexible; you can opt for a monthly or quarterly pay outs or reinvest in principal
  • Tax Saving FD interest rates remain unchanged over the five-year period
  • Interest rates differ from bank to bank, and rates for Indian citizens, Hindu Undivided Family (HUF) also vary
  • Tax Saving FDs can be held in a single or a joint mode. If it’s a joint Tax Saving Fixed Deposit, tax benefits are available only to the first account holder.

Advantages of Tax Saving Fixed Deposits compared to other Section 80C investments

The two most common options for claiming income tax exemption under Section 80C include equity-linked savings scheme (ELSS) and Public Provident Fund (PPF). The main advantage that a Tax Saving FD has over ELSS is that it is not market-linked. While ELSS has a lower lock-in period of three years, the minimum investment required is Rs 500. Also, ELSS comes with some amount of risk as it is market-linked. The minimum investment required in a Tax Saving Fixed Deposit is Rs 100. While you can open a PPF Account with an opening balance of Rs 100, the minimum investment has to be Rs 500. Also, a PPF comes with a lock-in period of 15 years.

Who should invest in a Tax Saving FD?

Before selecting any investment option, you need to consider your age, risk appetite and investment horizon.

  1. You are nearing retirement and have a low-to-zero risk appetite: A Tax Saving FD is a good choice for you, as it provides dual benefits of guaranteed returns and low risk. You can compare from the Tax Saving FD interest rates and choose the one that fits your investment requirements.

  2. You need to save taxes: You can claim a Fixed Deposit income tax exemption under Section 80 C to save taxes.

How much should you invest under the Tax Saving FD scheme? What will the maturity amount be?

Now that you know all about the Tax Saver FDs and tax saving FD interest rates, it’s time to calculate the interest rate (annualised) on your investment and that’s where a Tax Saving FD Calculator comes in handy. It also helps you arrive at an estimate of how much you would need to invest. A Tax Saving FD Calculator is available online and is offered by banks for the benefit of their customers. You can use it to compare different interest rates and pick one that offers the best, guaranteed returns. Calculating the maturity amount of your FD manually can be time-consuming and complex. When using a Tax Saving FD Calculator, all you need to do is input details such as the principal amount, the rate of interest (annual) and the tenure, to get your answer.

Conclusion

If you are looking at an investment option that fulfils the criteria of guaranteed returns, zero risk and growth, you should pick a Fixed Deposit. A Tax Saving FD is one step better: it is aimed at helping you claim a Fixed Deposit income tax exemption under Section 80 C of the IT Act for investments of up to Rs 1.5 lakh. A Tax Saving Fixed Deposit comes with a five-year lock-in period and a minimal investment requirement of Rs 100. You can look up interest rates for a Tax Saving FD scheme and invest your wealth in a safe and secure manner.

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