Tax Saving Fixed Deposit: 8 Things To Remember (2024)

A fixed deposit (FD) is an investment option offered by banks and Non-Banking Financial Companies (NBFCs) to help you grow your wealth safely and securely. If you want to save money on taxes, choose a Tax-Saving FD and take advantage of the Fixed Deposit Tax Exemption. Before investing, compare Tax Saving FD interest rates. Also, under Section 80C of the Income Tax Act,1961, they can claim a deduction for investments up to Rs 1.5 lakh in a fiscal year by investing in Tax-Saving FDs.

Tax-Saving FDs are the same as regular fixed deposits in that the maturity amount (principal amount + FD interest) is credited immediately to your bank account. These deposits have a 5-year lock-in term, and the Tax-Saving FD interest rates typically vary from 5.5% to 7.75%. However, the interest collected from these sorts of FD programs is taxable. If you haven’t made any tax-saving investments yet and are looking for a secure and straightforward way to save money, a Tax Saving Fixed Deposit may be the ideal option.

08 Things To Remember Before Investing in Tax-Saving Fixed Deposits

Investing in Tax-Saving Fixed Deposits in India can be a smart financial move as it not only helps you save on taxes but also provides a guaranteed return on your investment. However, it is important to remember certain key factors while investing in Tax-Saving FDs to ensure that you make the most of this investment option.

1. Eligibility: Tax-saving FDs are open to individual taxpayers, Hindu Undivided Families (HUFs), and Non-Resident Indians (NRIs). Joint accounts can also be opened, but tax benefits are available only to the first holder
2. Tenure: Tax-saving FDs have a minimum lock-in period of 5 years and cannot be prematurely withdrawn. It is important to remember that breaking the FD before the completion of the 5-year tenure will result in a penalty and loss of tax benefits
3. Investment Limit: The maximum investment limit in tax-saving FDs is Rs 1.5 lakh per financial year, which is also the maximum limit under Section 80C of the Income Tax Act.
4. TDS: Interest earned on Tax-Saving FDs is subject to TDS (Tax Deducted at Source) if it exceeds Rs 10,000 per financial year. It is crucial to submit your PAN (Permanent Account Number) to the bank to avoid TDS
5. Risk–Free: Tax-saving FDs are considered a safe and secure investment option, as they are backed by the government. Additionally, they are protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which provides insurance of up to Rs 5 lakh per depositor, per bank
6. Compound Interest: Tax-saving FDs offer the option of compound interest, which can help you earn higher returns on your investment. It is important to remember that compound interest is calculated annually and will result in a higher amount of interest earned over 5 years
7. Premature Withdrawal: Tax-saving FDs cannot be withdrawn prematurely but they can be pledged as collateral for a loan. Remember that breaking the FD will result in a penalty and loss of tax benefits
8. Maturity: On maturity, the depositor can choose to either reinvest the matured amount in another Tax-Saving FD. Or withdraw the money and use it as per their preference

Benefits of Tax-Saving FDs

Some of the key benefits of Tax-Saving FDs include;

• Guaranteed returns: Unlike various financial instruments whose returns vary depending on the market situations, a Tax-Saving FD assures returns within a stable range. However, the interest rates offered might change due to TDS
• Beneficial for Beginners: New investors might not want to invest large amounts initially. Therefore, this type of FD allows you to begin investing from an amount as low as Rs 10,000
• Appointment of Nominator: One can opt for a nominator facility, which includes nominating an individual who may take over the proceeds of the account on the behalf of the owner
• Short duration for lock-in: Tax-Saving FDs have a shorter lock-in period of only five years as compared to other types of FDs
• Tax Benefits: According to Section 80C of the Income Tax Act of 1961, anyone who has invested in Tax-Saving FDs is qualified to claim tax deductions for an amount up to Rs 1.5 lakh

Now that you’ve gained enough knowledge about Tax Saver FDs and Tax-Saving FD interest rates. it is time to compute the annualised interest rate on your investment, which is where a Tax-Saving FD Calculator proves to be immensely helpful. It also assists you in determining how much money you will need to invest. A Tax Saving FD Calculator is available online and is provided by banks to their existing and potential clients. You may use it to evaluate several interest rates and choose the one that provides the best returns.

Conclusion

If you seek a low-risk investment with long-term guaranteed profits, Tax-Saving Fixed Deposits are the appropriate investment solution. It is also perfect for individuals who desire to save up to Rs 1.5 lakhs in income tax exemption in a fiscal year under Section 80C of the Income Tax Act, 1961.