A tax saving fixed deposit (FD) is a fixed deposit facility that offers tax deduction under Section 80C of the Income Tax Act, 1961. You can claim a tax deduction of a maximum of up to ₹1.5 Lakhs p.a when you invest in a tax-saving fixed deposit. Tax saving FDs have a lock-in period of years and cannot be prematurely withdrawn before the investment period. However, you can extend beyond the 5-year tenor if you wish to do so.
Much like other FDs, a tax saving FD is an extremely safe investment instrument that is not linked to the market, hence your capital and returns are safe from market fluctuations. Additionally, a tax saving fixed deposit offers predetermined and guaranteed returns on investments.
Tax saving FD interest rates can range anywhere between 5.5% to 7.75% depending on your banking partner and your chosen investment option. Much like with a regular FD, senior citizens will get higher tax saving FD interest rates. Interest earned on tax-saving fixed deposits is subject to TDS as per the investor’s tax bracket. If any tax is owed on the interest gained, the tax should be paid on or before March 31 of each financial year.
Features and Benefits of Tax Saving Fixed Deposits
There are a number of advantages to investing in a tax saving FD. They are one of the safest financial instruments available in the market, they provide predictable and assured returns while also offering incredible tax benefits. This makes tax saving FDs one of the most common investment vehicles for anyone looking to make safe, reliable investments that help reduce tax liability.
Let’s take a look at some of the key features and benefits of tax saving FDs to get a clearer understanding.
Guaranteed Returns
A tax saving FD is a great investment option for people not just looking to optimise their investments by saving up on taxes, but also for people looking for consistent, predictable and guaranteed returns. When you invest in a tax saving FD, the interest rates are predetermined and assured.
Nominal Deposit Amount
The minimum deposit amount for a tax saving FD would depend on your banking partner, however, many financial institutions offer these FDs with the deposit amount as low as ₹1000.
Safe Investment Option
A tax saving fixed deposit is one of the safest financial instruments offered by banks as it is closely monitored and regulated by the RBI. It also comes with low levels of risk as it is not affected by market fluctuations and so you can rest assured that both your capital and returns are safe.
Tax Benefit
When you invest in a tax saving FD, you can claim tax deductions up to ₹1.5 Lakh per annum according to Section 80C of the Income Tax Act, 1961. This would help you save up on taxes and optimise your investments.
Attractive Interest Rates
Apart from giving you assured returns, tax saving FD interest rates are extremely attractive, ranging from 5.5% to 7.75%. This will ensure that your money grows at a good pace. If you opt for a non-cumulative tax saving FD, you will also receive your interest payouts in regular intervals giving you a fixed and regular source of passive income.
Take Advantage of the Power of Compounding
With most tax saving FDs, your interest is accrued, meaning it becomes a part of your investment corpus. This gives you the added benefit of compounding, which increases your maturity amount substantially.
Senior Citizen Benefits
Most banks offer higher tax saving FD interest rates to senior citizens, which makes their return on investment significantly higher. This coupled with the tax benefits of tax saving FDs makes for a great investment instrument that not only offers higher returns but also helps save on tax liability. Typically, senior citizens will get anywhere between 0.25% to 0.50% higher interest rates than regular citizens.
Conclusion
A tax saving FD is one of the best investment instruments for anyone looking to make safe, reliable investments that offer tax benefits. While your interest earnings are taxable as per your tax bracket, you can claim a tax deduction of a maximum of ₹1.5 Lakhs p.a by when you invest in a tax-saving FD. Investing in a tax saving FD will help you make risk-free investments that offer both assured returns and tax benefits.
