FDs are a safe way to grow your savings over the course of time. However, one of their more valuable benefits is the ability to save on taxes up to a specific limit with the right scheme. For instance, opting for a tax-saving FD is one of the best ways to avail deductions under Section 80C of the Income Tax Act, 1961.
These accounts are provided by most major banks and NBFCs across the country and are considered to be similar to other such instruments. These include National Savings Certificate (NSC), Public Provident Funds (PPF), and pension plans, among others.
Such FDs can allow people to get tax-saving benefits of up to ₹1.5 Lakhs during an ongoing financial year. Find out the features and benefits of availing a tax-saving FD, and much more in the following sections.
Some of the basic features of tax-saving FDs are:
Most convenient way of saving on taxes under Section 80C of the Income Tax Act, 1961
Lock-in period of 5 years
Deposit amounts can range between ₹100 and ₹1.5 Lakhs during the ongoing financial year
Interest rates remain unchanged during the 5-year lock-in period but vary across issuers and types of people
The interest amount can be claimed during the same year in which the investment has been made.
Here are the benefits of opting for a tax-saving FD:
Such FDs are available throughout the year, unlike tax-free bonds issued by the government
Guaranteed returns on investments along with tax-saving benefits
You can open a joint tax-saving FD account with others*
Availability of nomination facility to transfer funds on any unfortunate event
Freedom to choose interest payout options between monthly, quarterly, and annually
Senior citizens can be eligible for additional interest over the base rates
You will not be charged TDS on interest on filing Form 15G or 15H
* It is important to note that in the case of a joint tax-saving FD account, only the primary account holder will be eligible for the tax-saving benefits.
Indian residents above the age of 18 years and HUFs can be eligible for booking a tax-saving FD. Minors can also open one jointly with an adult.
Investments in Tax-saving FDs can be made via most private or public sector banks or NBFCs, with the exception of rural and cooperative banks.
You will not be able to prematurely withdraw funds or get a loan against such FDs under 80c due to the 5-year lock-in period.
The interest earned in this FD scheme will be subject to TDS according to the tax bracket you fall under. This can be avoided by submitting Form 15G or 15H to your bank.
Here, TDS is applicable if the overall interest earned exceeds ₹40,000 during the financial year in the case of individuals. However, the interest can exceed ₹50,000 for senior citizens.
While senior citizens do get higher interest rates on their 80c FD deposits by most issuers, this is not the case with post office time deposits.
The nomination facility will not be applicable for accounts opened for or held by a minor.
You will be required to submit certain documents such as your address and identity proofs in order to open a tax-saving FD account. Here is a list of some of the ones that you can provide:
Bank statement with Cheque
Electricity or Telephone bill
ID Card or Certificate issued by a Post Office
Voter ID Card
Government ID Card
Senior Citizen ID Card
While considering investment options that provide tax exemption benefits under Section 80C, the two most common ones include Public Provident Fund (PPF) and Equity-linked Savings Scheme (ELSS).
One of the major advantages that tax-saving FDs have over ELSS is that they are not market-linked. ELSS investments feature a shorter lock-in period of 3 years, but require a minimum investment amount of ₹500, in comparison to ₹100 for tax-saving FDs.
Similarly, PPF accounts have an extended lock-in period of 15 years and a minimum investment amount of ₹500, despite an opening balance of ₹100.
Opening a tax-saving fixed deposit under 80c can have multiple benefits for you in the long run along, while also providing you with guaranteed high returns. This can be especially useful if you have a low-risk appetite or if you are close to retirement.
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