March is that time of the year when you’re no different from a headless chicken. Only, you’re running around pecking at investments to save tax at the last minute.
A mere week away from the deadline of 31st March 2015, diligence finally overpowered procrastination and I sat down to take care of my taxes.
The evergreen Section 80C
Even if I can’t figure out much else about taxes, this section is almost like a helpful pal I visit once a year. Saving on taxes! Sweet music to my ears. The pesky question now remained – how could I do that with such little time on my hands?
As I surfed the internet for different forms of investments, I grew despondent. While there was a lot of information on the subject, it all looked quite complicated to me. Let’s face it, finance-savvy I’m not. I berated myself for not having planned my finances better through the year.
In the interest of time, I did the next best thing I could to zero in on the right investment product for me. I called my personal finance advisor – my dad!
Dads will always be dads. He was actually expecting my call. He suggested I put my money in a ‘Tax Saver Fixed Deposit’ at a bank. Here’s why.
TAX SAVER FIXED DEPOSITS
As the name suggests, these schemes, offered by banks, not only let depositors earn returns on their savings but also save on taxes.
How much would I save?
Up to Rs.1.5 lakhs deposited in these FD accounts qualify for deductions U/S 80C. (This used to be capped at Rs.1 lakh earlier but it was recently raised to make it a more attractive tax savings option).
Of course, to claim the exemption, the deposit has to be held for a term of 5 years i.e. funds are locked-in and can’t be withdrawn partially nor can the account be closed prematurely. Also, the benefit is only available for this financial year (but like I said, I’m going to make a better go at my finances for the next year).
For now, I could safely put away the required amount to save on taxes in this FD scheme and not worry about it. Given that I have a regular source of income, liquidity isn’t that big a priority as savings and returns are to me.
‘Interesting’ to note…
It offers a fixed rate of interest that can be compounded regularly over the term of the deposit. So, I know at the outset how much I’m going to receive as maturity proceeds at the end of 5 years.
I could also opt to have the interest paid out into my account instead of having it reinvested but considering that I’m looking at this purely from an investment perspective, I’ll skip that.
My dad did point out that the interest I earn on a tax saver fixed deposit will be taxed, as is usually the case with bank FDs. But, I’ll let it fly since my principal deposit i.e. Rs.1.5 lakhs is tax-exempt, which is really why I’m considering this investment.
He also told me that interest rates are likely to reduce in the coming year, already signalled by cuts on bank FDs in recent times. This meant that I would be locking-in at high rates if I invested now, making it a good long-term option.
Two birds, one stone?
Banks are known for being safe places to park funds. So I won’t have to worry about what happens to my money over the next 5 years. And considering these schemes don’t offer auto-renewal facilities, if I’m likely to forget or not monitor my account as I should over that period, I could just open the account in my husband’s name and operate it jointly – then we could both avail the tax benefit.
Dad immediately clamped his foot down. By opting for a joint account, the whole point of my investment would be lost. Only one person i.e. the first holder of a joint tax saver FD account is allowed to claim the tax benefit. It would have to be held in my name and I would have to make sure I received and produced the Fixed Deposit Receipt (FDR) in order to claim the exemption.
Tax saver FD choices in this financial year
After weighing all the pros and cons of tax saver FDs (even last minute investments require prudent consideration), I set out to find the best scheme to invest my money in. After researching online, I decided to choose from among the following
- State Bank of India Tax Savings Scheme, 2006
- ICICI Bank Tax Saving Fixed Deposit
- Punjab National Bank Tax Saver Fixed Deposit Scheme
- Canara Bank Tax Saver Scheme
- HDFC Bank 5 Year Tax Saving Fixed Deposit
The interest rates for all these schemes are the highest in the market at 8.75% p.a. Besides the attractive interest offered, these banks have other features that prompted me to consider them.
State Bank of India (SBI) and Punjab National Bank (PNB), for example, don’t cap the deposit duration at 5 years and offer durations up to 10 years. This is great for long-term returns.
Also, PNB lets you avail loans against this deposit once the 5-year lock-in period is complete.
ICICI Bank, a leading private sector bank, has a great online platform, which will make it easier to monitor my account. Similarly, HDFC Bank and Canara Bank also are known for their excellent customer service and one can deposit amounts as low as Rs.100.
All these banks are well spread throughout the country, which means they have branches practically everywhere I might go making them easily accessible.
Can I open the FD and claim tax benefits in time to file my returns?
Besides the fact that I can choose to walk into any one of the branches to open the account (which is something Dad would do), I can simply open the account online either through my chosen bank’s website or through an online financial services provider which lets me compare and apply for fixed deposits of different banks. This means I get to make my investment, claim the tax exemption and move onto filing my income tax returns well in time.
I thanked Dad for the timely advice and quipped that since most banks don’t provide loans against tax saving FDs, I could always borrow money from him.
What do you think he did?
Well, dads are dads. He hung up!
– A tax-saver groupie