How do Fixed Deposits help you Save Tax?


Fixed deposits have always been a popular investment option for Indians due to simplicity, security and fixed returns. But the only problem with the investment in FDs is that its interest is fully taxable. The whole amount of interest earned on fixed deposits it added to the income and taxed at the marginal rate applicable on the investor.

However, if you are looking at tax savings via fixed deposits then you should consider investing in tax saver FDs.

What are the Tax-Saving Fixed Deposits?

Tax-saving fixed deposits are special fixed deposits that help the investor enjoy tax savings via investing in fixed deposit. They are also known as tax saving deposit schemes, which are different from the conventional or regular fixed deposits. Any investment made in this tax saving instrument is eligible for deduction under section 80C.

The interest rates on these fixed deposits generally range between 6% to 7.70% for the general category and 6.5% to 8.2% for senior citizens.

Tax Break Available on These Fixed Deposits:

The principal amount invested in the initial year is available as a deduction under section 80C in the year of investment. But the interest earned on these deposits in the subsequent years is taxable as regular interest income.

Interest on Tax Saving Fixed Deposits:

The interest on tax saving fixed deposits is available on monthly or quarterly basis based on the investor’s preference. You can also opt for quarterly compounding of interest with reinvestment with principal amount.

The interest payable on these deposits is taxable in the hands of investors. Hence, the tax is deducted at source (TDS) by the bank in accordance with the prevailing income tax rules for TDS. So in case you are exempt from paying tax, you need to submit the Form 15G or 15H at the beginning of each financial year to notify the bank to not deduct TDS from your interest income.

Other Features of Tax Saving Fixed Deposits:

  1. Only individuals and HUFs with a PAN number are allowed to invest in tax saving fixed deposits.
  2. These tax saving FDs comes with a fixed tenure of 5 years with no premature withdrawal allowed. So in case you want to enjoy tax advantage under section 80C, you need to invest for a minimum period of 5 years.
  3. The minimum amount of investment in these fixed deposits varies from bank to bank.
  4. A maximum deduction only up to Rs. 1,50,000 can be invested in tax saving deposit schemes and claimed as deduction.
  5. A fixed deposit receipt is issued by the bank or lender to claim tax saving breaks.
  6. This fixed deposit cannot be pledged as a security for a loan.
  7. You can invest in these deposits at any bank (public or private) except co-operative banks and rural banks.
  8. The investment in Post Office Time deposit for a period of 5 years is also eligible for deduction under section 80C.
  9. This investment can be held in single mode or joint mode. But in case it is held jointly, the tax exemption is only available to the first holder.
  10. Nomination facility is also available for these FDs.

Interested in safely investing your money and gaining a tax benefit too