Tax Exemption on FD

When looking for safe investment avenues, fixed deposits continue to have a prominent standing in the market. In fact, the tax exemption on fixed deposits is a key benefit you can avail yourself when you invest in a tax-saving FD. 

Since this distinct benefit is not available on all FDs, the ones which do have are also referred to as tax saving FDs. Though this FD works similarly to a regular fixed deposit, tax exemption under Section 80C of the Income Tax Act is applicable.

In a tax-saving FD, you can open an account either as a single or joint holder. However, in the case of a joint FD, this income tax exemption on FD applies only to the first holder. 

To know more about the features and benefits of tax-saving FDs, read on.

Tax deducted at source or TDS is the concept of collecting tax directly from the income source of an individual. This collection is done by the IT department of the Indian government. That being said, on filing the ITR the individual, whose income has been taxed can get the tax deducted by submitting TDS certificate or Form 26AS that is issued by the deductor. TDS is applicable for any interest that is earned on FDs.

In simple terms, when you can avail income tax exemption on fixed deposits, it is termed as a tax-saving FD. The tax exemption on FD made available is according to section 80C of the Income Tax Act. 

When you book this FD, tax exemption benefits of up to ₹1.5 Lakhs can be availed. However, this limit includes all other investment instruments eligible for tax exemption under section 80C of the Income Tax Act.

These tax-saving FDs come with a lock-in period of 5 years and offer fixed returns similar to regular deposits. So, no matter the market conditions, the returns you earn on a tax-saving FD are stable.

However, there are a few points to remember, such as premature withdrawal is not available with this 5-year FD. Tax exemption is only available if you stay invested. This means that your interest income from this FD will be taxed as per the tax slabs.

Here are a few key features to know before you opt for FD with the tax exemption benefit:

• Opting for an income tax exemption on FD reduces your tax liability

• It has a compulsory lock-in duration of 5 years

• Nominee facility is available for investors

• No tax exemption on FD interest earnings 

• Interest rates differ from one financial institution to another. You have the option of opening a tax-saving fixed deposit account with another individual also. In such a scenario, the benefits of tax are applicable only to the first FD account holder.

• No change in interest rates within the 5-year tenor

• Auto-renewal option is not applicable

• Option to enjoy flexible interest pay-outs monthly or quarterly

• Availing loan or overdraft facility is not possible in a tax-saving FD

• Upon maturity of the tax-saving fixed deposit, the maturity amount will be directly credited to the savings account that is associated with your fixed deposit.

When investing in a fixed deposit, income tax exemption is one of the main benefits you can enjoy. However, to avail these benefits, you need to be eligible to apply for a tax-saving FD. While the eligibility terms may vary, here is a list of who can avail income tax exemptions on FDs.

• Hindu Undivided Families

• Resident Individuals above 18 years of age

• Minors, along with a joint custodian

• Indian residents

• Senior citizens

• Sole proprietors

• Non-resident Indians

• Societies, associations and trusts

• Partnership firms

• Religious and educational institutes
   

Note that any amount invested in a post office scheme for 5 years also qualifies as a tax saving deposit. You can also transfer post office term deposits from one office to another throughout India. 

As mentioned, for FD interest, tax exemption is not possible and tax is deducted at the source. Keep in mind that TDS is applicable only if your interest earnings exceed ₹40,000 in a year. This limit is extended to ₹50,000 per year if you are a senior citizen investor.

However, there is an option to avoid tax deduction at source on your interest earnings too.

Simply submit for 15G if you are a non-senior citizen investor and form 15H if you are a senior citizen investor. After submission and review, the bank will not deduct TDS from your returns.

When it comes to fixed deposit interest, income tax exemption is possible in other ways too. For example, you may time your investment so that the total interest earned during a financial year does not exceed the taxable amount. This way, you can avoid TDS on your earnings.

• Submit all the necessary documents as per bank norms

• Apply for a PAN card, if you don’t have one, as it is a crucial document

• Fill out the form accurately and clearly to avoid any confusion or delays

• Produce original documents along with copies for easy verification 

• Include the nominee without fail when booking a tax-saving FD

• Provide your permanent residential address and contact number

Apart from tax-saving FDs, the above-mentioned plans are some tax-saving investment instruments. However, FDs continue to rule the market because of the capital protection and returns you get, irrespective of market conditions.

So, before investing in a regular or tax-saving FD, check out the prevailing FD rates across various financial institutions. Visit Bajaj Markets and invest in a fixed deposit that best aligns with your financial goals.