Tax-saving fixed deposits (FDs) are a popular low-risk investment option that provides guaranteed returns and helps you save on taxes. Under Section 80C of the Income Tax Act, these FDs offer tax benefits up to ₹1.5 lakh, making them a preferred choice for individuals looking to reduce their tax liabilities.
If you also want to know how to save tax on FD interest, this guide will explain the features, benefits, and critical considerations of tax-saving FDs to help you make informed decisions about using this instrument for tax savings.
What is a Tax-Saving Fixed Deposit?
The tax saver fixed deposit meaning implies a traditional fixed deposit offered by banks and post offices specifically aimed at helping individuals save income tax. Investing in tax-saver FDs under Section 80C can lower your annual tax burden.
Like regular fixed deposits, money invested in tax-saver FDs gets locked in for a 5-year tenure while earning a fixed interest rate payable on maturity. The key differences are:
Minimum Holding Period: Tax-saving FDs have a mandatory holding period of 5 years.
Premature withdrawal is not allowed.
Section 80C Benefit: They qualify for a maximum tax deduction of ₹1.5 lakh under Section 80C for the invested amount.
Interest Income: Interest earned is taxable, while only interest above ₹40,000 gets taxed in regular FDs.
In short, tax-saver FDs meant for claiming deductions differ from standard FDs regarding lock-in rules, tax benefits, and interest taxation.
Benefits of Investing in Tax-Saving FDs
Tax-saver fixed deposits offer these advantages:
1. Tax Savings up to ₹1.5 lakh
By investing in tax-saver FDs, you can claim deductions under the overall Section 80C limit of ₹1.5 lakh based on your deposit amount. This lowers your taxable income, ensuring more significant tax savings annually.
2. Guaranteed Returns
Tax-saving fixed deposits carry fixed interest rates like regular FDs, guaranteeing fixed returns on your capital. The interest accrues cumulatively and gets compounded over the tenure, boosting your deposit amount.
3. Tax Exemption
The principal invested qualifies for tax deduction, while the interest income accrues tax-free annually. The cumulative interest earned is subject to tax on maturity, making only gains above ₹40,000 taxable.
4. Low Risk
With sovereign guarantees from banks and no exposure to market risks leading to capital erosion, tax-saver FDs are a risk-free means to earn stable, fixed returns over five years.
5. Loan Eligibility
Fixed deposits, including tax-saving variants, can be easily pledged as collateral security to take loans from banks at attractive interest rates, providing liquidity against your investment.
Points to Remember While Investing in Tax-Saving FDs
Despite the benefits, certain things concerning liquidity, interest rates and investment process merit consideration:
1. Lock-in Clause
The 5-year lock-in period means fund access only after maturity. Premature withdrawals are not allowed.
2. Interest Rate
Banks offer 50-100 basis points lower interest than on regular fixed deposits.
3. No TDS Exemption
Tax deduction at source at 10% is applicable if accrued interest crosses Rs. 40,000, even on tax-saver FDs.
4. KYC Documentation
To open tax-saver FDs, you need officially valid ID proof, address proof, and passport-size photographs.
5. Minor Accounts
Tax saver FDs cannot be opened in a minor’s name, and guardians cannot invest funds on a minor’s behalf.
Conclusion
For medium—and long-term financial planning, tax-saver FDs offer assured returns coupled with income tax deductions to effectively cut your tax outgo. Evaluate leading banks’ tax-saving FD interest rates and align the investment to your risk appetite and time horizon before investing to optimize tax savings.
FAQs
1. Is the interest earned on tax-saver FDs taxable?
Yes. Accrued interest earned on tax-saving FDs is subject to income tax as per your tax slab.
2. Can I take a loan against my tax savings FD?
Tax-saving FDs can be used as security for loans since withdrawal is permitted after the maturity period.
3. What is the minimum amount I must invest in tax-saver FDs?
Through recurring deposit mode, you can start a tax saver FD with as low as ₹100-500 per month. The minimum lump sum amount for investment is ₹1000.
4. Can senior citizens invest in tax-saving FDs?
Yes, senior citizens can invest in tax-saving FDs. Some banks offer higher interest rates on these deposits to senior citizens.
5. Can I extend my tax saving FD after the five-year tenure is over?
Yes, most banks allow the renewal or extension of tax-saving fixed deposits for further tenure after the mandatory lock-in period of 5 years.
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