10 main things you need to know about tax saving fixed deposits

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Fixed Deposits is easiest form of savings and investment in India. In most fixed deposit schemes, money is deposited for certain time period and fixed interest rate is paid after maturity. However, there are still some things you must know about tax benefits of fixed deposit schemes in order to get best return on your investment.

Tax Saving Fixed Deposit

Tax saving fixed deposit is special category of fixed deposits, where you get tax benefits when they invest sum of money in deposit. This application process for fixed deposits is simple and hassle-free. It also gives you fixed return. Also Read How does Fixed Deposits Help You Save Tax?

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Apart from tax, these FDs offer you guaranteed returns. It is one of popular tax saving instruments like NCS, PPF, ELSS and Term Insurance. Here are 10 main things you need to know about tax-saving fixed deposits.

Before investing in it you must know its features

If you are going to invest in tax saving fixed deposit, you can claim amount up to Rs. 1.5 lakh as deduction from your income. This invested amount is to be deducted from gross income under Section 80C of Income Tax Act, 1961. As per Current law limit is fixed at Rs. 1.5 Lakh.

Only Individuals, Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) can invest in tax saving fixed deposit scheme. Any business, corporate entity or minor cannot invest in these instruments. See How to make best use of your tax saving through investment

5-Year Lock-in Period

Most important point to know before investing in tax saving FD is that it has lock-in period of 5 years. This means that FD has lock-in period of 5 years. Premature withdrawals and loan against this FD is not allowed. You can invest in this tax saving FD through any public or private sector banks. But rural and cooperative banks do not provide this facility.

Minimum Amount Vary

If you are looking for lock-in period with guaranteed returns, this is best option of shorter period. Minimum amount for tax-saving fixed deposit varies from bank to bank. However, interest rates on tax saving FDs are higher than normal FDs.

Some banks also provide higher interest rate to employees and senior citizens. But this offered rate by bank remains same throughout 5 years. Interest is taxable and is added to your income after tax deduction at source.

Tax Benefits under Section 80 C

As per above, tax-saving fixed deposits are eligible under section 80C of Income Tax Act for tax deduction. This rule is applicable in all bank tax-saving term deposit options. This amount will be deducted from gross income to calculate your taxable income. Maximum deduction for tax-saving FDs is Rs 1.5 Lakhs.

Interest are paid monthly or quarterly

Even if schemes vary from bank to bank, most of banks offer monthly or quarterly scheme. But interest will be credited according to scheme made by you. If you have opted for monthly scheme, then interest will be given on monthly basis and quarterly in case of quarterly plan.

If you want to reinvest interest, you must choose scheme that offers this facility. Reinvesting interest is good idea as it adds to total amount invested and next interest increases. Rate of interest is applicable as per 5 year deposit rate and interest is compounded quarterly.

Tax Saving Fixed Deposits are risk-free

You will get regular interest from bank throughout five year tenure. This interest rate is fixed for your tax saving FD. Rate does not change during period. Hence, your money is protected and returns are guaranteed. It also gives you to start with small amount so you don’t have to lock-in huge amount. Interest earned is taxable as per tax bracket, therefore TDS is also applicable.

Nomination facility is also available

Tax-saving fixed deposits offer nomination facility. In case holder dies before maturity of FD, nominee can take amount along with interest when FD matures. In order to take benefit of this facility, you have to fill nominee details at time of investing.

Invest through Public or Private Sector Banks

You can invest in tax saving FD through any public or private sector bank. But cooperative banks and rural banks do not provide this facility. Tax saving FD can be transferred from one branch to another branch of bank.

Joint Holding is allowed

You can hold this FD in single or in Joint Account. You can also invest in tax saving fixed deposit along with joint holder but tax benefit will be offered to first holder only.

Post Office Deposits also offer Tax Benefits

In addition to tax saving fixed deposits, post office time deposits of 5 years are also qualified for tax deduction under section 80 C of Income Tax Act. It also considered as good tax saving instrument. These deposits can transfer ease from one post office to other without hassles.

Nowadays, banks have made application process completely online. If you have completed KYC procedure at your bank, you do not have to visit branch to open FD. Just log on to official website of bank and fill FD form.  So if you are thinking to invest your funds in an FD, it is better to choose tax-saving fixed deposits. Because these give you guaranteed returns and at same time it will save tax. Read Risks and Benefits in Bonds

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