A Sneak Peek Into Tax-Saving Fixed Deposits

Although Fixed Deposits are not eligible for tax sops, those that are held for 5 years or more qualify for tax deductions under Section 80C. Here’s a sneak peek.

Fixed Deposits are one of the most loved and sought after investment options, especially by conservative investors. It offers surety of returns, is subject to low or negligible risk and investing in it is as convenient as visiting a ‘chai’ joint around the corner. The only thing this investment tool lacks is a provision for tax sops.

Or so you think!

Although FDs are not eligible for tax sops, any FD held for five years or more qualifies for tax sops under Section 80C of the Income Tax Act. By parking your money in a tax-saving FD you can claim up to Rs. 1.5 lakhs as a tax deduction. The amount invested in a tax saving FD will get deducted from your gross total salary.

Additional Reading: Everything You Need To Know About Fixed Deposits

For many, this deduction can bring your salary down from the 30 percent tax bracket for example, to the 20 percent bracket. Sounds great, doesn’t it?

You’re probably already excited to stash your money away in a tax-saving FD, but before you do, make sure you equip yourself with the following information:

• Who can invest in a tax-saving FD? Individuals and Hindu Undivided Families. However, corporates and business entities cannot invest money in a tax-saving FD.
• As with most investments, there is a minimum amount you must invest in a tax-saving FD. Although this amount can be as little as Rs. 500, it may vary from bank to bank. So, before you part with your money for five long years, make sure you invest the minimum amount that’s eligible for tax sops.
• Some of you may be scheming to invest money in a 5-year tax saving FD with a plan to make premature withdrawals. Unfortunately for you, premature withdrawals are not allowed on your tax-saving FDs. Even if such a provision exists, you might have to pay a heavy charge for it. Also, banks do not grant loans against tax-saving FDs.
• If you are keen on investing in a tax-saving FD, then make sure you’re investing with a public or a private sector bank. Co-operative and rural banks do not offer tax-saving FDs.

Additional Reading: Read More on Fixed Deposit and Invest Wisely

• If you are a die-hard fan of post office investment schemes, here’s some good news. Your investment qualifies for tax sops under Section 80C of the Income Tax Act even if you opt for a 5-year Term Deposit offered by post offices.
• You can also transfer your tax-saving Term Deposit from one post office to another.
• Two is always better than one. Just like joint accounts, you can hold a joint tax-saving Term Deposit account. However, when it comes to tax benefits, only the first account holder is eligible to apply for them.
• Like with ordinary FDs, interest earned on tax-saving FDs is taxable as per the investor’s tax bracket. You can choose to receive the interest on a monthly or quarterly basis or opt to reinvest it.
• Keep in mind that five years is a long time. Hence, it’s advisable that you name a nominee for your tax-saving Term Deposit.
• Most banks offer a better rate of interest on a tax-saving FD. Interest also differs for senior and non-senior citizens, where the senior citizens have more to gain.

Additional Reading: 5 Reasons To Open A Fixed Deposit Today

Now you should be all ready to invest in a tax-saving Fixed Deposit. If the five-year tenure gives you the jitters, then you can take a shot at investing in ordinary FDs.