A Tax Saving FD is a special deposit scheme designed to provide tax benefits under section 80C of the Indian Income Tax Act, 1961. By investing in this FD, investors can avail themselves of a deduction on the invested amount of up to Rs 1.5 lakh from their taxable income.
Despite its unique tax-saving feature, a tax-saving FD functions much like a regular fixed deposit. The maturity amount, which includes the principal amount and the interest earned, is directly credited to the investor’s bank account.
The lock-in period for these deposits is typically five years, during which the invested amount cannot be withdrawn. The interest rates on tax-saving FDs usually range from 5.5% to 7.75%.
It’s important to note that while the investment offers tax benefits, the interest earned from the tax-saving FD is taxable. However, if you are yet to explore tax-saving investment options and prefer a secure and straightforward method to save on taxes, a tax-saving fixed deposit could be an excellent choice for you.
Features of Tax Saving Fixed Deposits
Tax Saving Fixed Deposits offer a convenient and effective method to avail tax benefits under section 80C of the Income Tax Act. By investing in these deposits, individuals can enjoy the advantages of tax savings along with the potential for attractive returns on their investment.
These FDs provide flexibility in terms of the minimum deposit amount, starting as low as Rs. 1000, making it accessible to a wide range of investors. However, there is a maximum limit to the deposit amount one can make in a financial year.
The tenure or lock-in period for Tax Saving Fixed Deposits typically ranges from 5 to 10 years, allowing investors to choose a suitable investment horizon based on their financial goals and requirements.
Furthermore, these fixed deposits also offer the convenience of a nomination facility, ensuring that the designated nominee can easily claim the investment in case of the investor’s unfortunate demise.
Before investing in Tax Saving Fixed Deposits, it’s essential to keep the following points in mind:
1. Eligibility: Tax saving FDs are open to Resident Individuals above 18 years and HUFs. Minors can also invest jointly with an adult.
2. Minimum Deposit: The minimum deposit amount varies among banks, but the maximum investment allowed is Rs. 1.5 lakh per financial year, which is also the limit for tax-saving investments under section 80C of the Income Tax Act.
3. Lock-in Period: These deposits have a lock-in period of 5 years, during which premature withdrawal and loan facilities are not permitted.
4. Investment Options: Tax saving FDs can be opened in any public or private sector bank, except for co-operative and rural banks. Post Office Time Deposits of 5 years also qualify for tax deduction under section 80C.
5. Joint Account: Tax-saving FDs can be held in ‘single’ or ‘joint’ mode. However, the tax benefit is only available to the primary account holder in the case of a joint account.
6. TDS: The interest earned on these deposits is subject to TDS as per the investor’s tax bracket. To avoid TDS, investors can submit Form 15G (or Form 15H for senior citizens) to the bank.
7. TDS Threshold: TDS is applicable if the total interest earned exceeds Rs. 40,000 for individuals and Rs. 50,000 for senior citizens (under section 80TTB) in a financial year.
8. Nomination: Tax-saving FDs offer a nomination facility, except in the case of deposits held by or on behalf of a minor.
9. Senior Citizen Interest Rates: Some banks offer higher interest rates for tax-saving FDs to senior citizens. However, the post office does not provide higher tax-saving FD interest rates to senior citizens.
Considering these points will help you make an informed decision while investing in Tax Saving Fixed Deposits and effectively utilize the tax-saving benefits they offer.
Documents Required for Tax Saving Fixed Deposits
To open a tax-saving fixed deposit in banks and post offices, you need to provide identity and address proof. The acceptable documents for identity and address proof are as follows:
Identity Proof:
1. Passport
2. PAN card
3. Voter ID card
4. Driving license
5. Government ID card
6. Senior citizen ID card
Address Proof:
1. Passport
2. Telephone bill
3. Electricity bill
4. Bank statement with a cheque
5. Certificate/ID card issued by the Post office
When applying for a tax-saving fixed deposit, make sure to have these documents ready as they are essential for the account opening process and meeting the regulatory requirements.
Points to note while submitting the documents
When submitting the documents for opening a tax-saving fixed deposit, please keep the following points in mind:
1. Accepted Documents: You have the flexibility to provide other identity proof or address proof documents, as per the specific requirements of the chosen bank.
2. Original and Photocopies: It is necessary to provide both the original and photocopies of each document for verification purposes.
3. Form Filling: Ensure that you fill the form in CAPITAL LETTERS using Black ink, unless otherwise specified by the bank. If there is any overwriting, please remember to countersign it.
4. Nomination Facility: It is highly recommended to avail of the nomination facility while opening the tax-saving fixed deposit.
5. Mandatory Information: Make sure to provide your permanent address and telephone number as these details are mandatory for the account opening process.
By adhering to these guidelines, you can smoothly submit the required documents for opening a tax-saving fixed deposit and complete the necessary formalities with the bank.
FAQs (Frequently Asked Questions) about Tax Saving Fixed Deposits:
1. Can I withdraw my investment before the completion of the lock-in period in tax-saving FDs?
No, premature withdrawal is not allowed in tax-saving fixed deposits during the lock-in period of 5 years.
2. Can I take a loan against a tax-saving fixed deposit?
No, tax-saving FDs do not offer the option to avail loans against the deposited amount.
3. What is the maximum amount I can invest in tax-saving fixed deposits in a financial year?
The maximum investment allowed is Rs. 1.5 lakh in a financial year, which is also the limit for tax-saving investments under section 80C of the Income Tax Act.
4. Is the interest earned on tax-saving FDs taxable?
Yes, the interest earned on tax-saving fixed deposits is taxable as per the investor’s income tax slab.
5. Can I submit Form 15G or Form 15H to avoid TDS on tax-saving FDs?
Yes, you can submit Form 15G (for individuals below the age of 60) or Form 15H (for senior citizens) to the bank to avoid TDS if your total interest income is below the taxable threshold.
Conclusion:
Tax Saving Fixed Deposits offer a simple and secure way to save on taxes while enjoying the benefits of fixed returns. With a lock-in period of 5 years, these deposits provide long-term savings and encourage disciplined investment habits. Before investing, it’s crucial to check the eligibility criteria, minimum deposit requirements, and interest rates offered by different banks. Remember to submit the necessary documents, including identity and address proofs, to complete the account opening process. By carefully considering these aspects and making informed decisions, individuals can make the most of the tax-saving benefits provided by tax-saving fixed deposits. Always consult with a financial advisor to understand how tax-saving FDs fit into your overall financial planning and investment strategy.
Read More:
- Post Office Savings Account: Benefits and How to Open an Account
- 7 Simple Ways to Start Saving for a Bright Future
- How can I grow my savings fast?
- Saving Account: Types, Interest rates, and eligibility criteria
