There are multiple investment instruments you can use to create wealth and boost your savings. A fixed deposit is an investment vehicle that provides a sound, risk-free base for investors to get stable returns on their invested corpus. Fixed deposits are one of the safest investments and help you save for rainy days. Apart from this, here are a few more benefits fixed deposit investors enjoy:
- Interest Rate Fluctuations
When invested in a fixed deposit, your capital is free from any interest rate fluctuations that might occur in the stock market.
- Flexible Tenure
You are free to choose the maturity period of a fixed deposit which can range from seven days to ten years.
- Simple Process
Opening a fixed deposit account is straightforward, and can be done online within a few clicks.
However, a fixed deposit investment is subject to taxation on the maturity amount.
What is a tax-saving fixed deposit?
As the tax filing season approaches, more individuals look for means to save their taxes. Investing in equities might be a little risky as your invested amount is exposed to market volatility. A more conventional approach can safeguard your investment and help you enjoy tax benefits. A tax-saving fixed deposit entitles you to tax benefits under section 80C. The post office tax-saving FD has similar characteristics as compared to a traditional fixed deposit. Here is a representation of the various characteristics that distinguish a tax-saving fixed deposit from a regular fixed deposit.
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Characteristics |
Regular Fixed Deposit |
Tax-saving Fixed deposit |
|
Invested amount |
Investors are free to invest any amount as they like in a regular fixed deposit. There is no upper cap on the amount that you wish to invest. Investors can select the amount they wish to invest depending on their goals. |
A tax-saving fixed deposit is characterised by an upper limit on the investment. Individuals entering this scheme can invest up to Rs. 1.5 lakh per annum to avail the tax benefits that come along with it. |
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Tax Benefits
|
Investors get a higher interest rate on the invested amount. However, it does not yield any tax benefits. |
Investments made under the tax-saving fixed deposit are exempt from Section 80C of the income tax act. However, the interest earned through this investment is taxable. |
|
Lock-in period |
The investment can have varying lock-in periods. Individuals can select a lock-in period that suits their needs. Lock-ins can vary according to the investor and can run from 7 days up to a period of 10 years. The investment tenure depends on the investor’s investment horizon |
A tax-saving fixed deposit carries a five-year lock-in period. It is mandatory for investors to keep the amount invested for five years to gain the maximum benefit. |
|
Returns |
Investors can opt for staggered returns on a monthly, quarterly, or yearly basis. Investors may choose specific returns depending on their liquidity needs and budget. |
Investors are eligible to receive the accrued interest only when the lock-in period ends. However, they are free to further reinvest the gains in the tax-saving fixed deposit upon maturity, based on their requirements. |
|
Liquidity |
A traditional fixed deposit offers liquidity in times of need. If you need urgent funds, you are free to liquidate your fixed deposit and access your money. |
Once you have invested your money into the tax-saving fixed deposit, you cannot liquidate it before the lock-in period ends. Additionally, during the tax saver FD lock-in period, you cannot take a loan against a fixed deposit. |
You may open a tax-saving fixed deposit with a joint account. The minimum amount you can invest in a tax-saving FD is Rs. 1,000, and the interest you receive ranges from 5.5% to 7.5% per annum. Note that you will have to start your tax-saving FD with a one-time lump sum investment.
Eligibility criteria for a tax-saving fixed deposit
Starting investment in a tax-saving fixed deposit is simple and requires you to meet basic eligibility criteria. Different banks and NBFCs may have distinct eligibility criteria. The basic requirements to enter into a tax-saving fixed deposit are outlined below:
- Citizenship
The applicant must be an Indian citizen.
- Age
The applicant must be over 18 years of age to participate in a tax-saving fixed deposit.
The scheme is open to individuals and Hindu Undivided Families (HUF).
List of required documents to open a tax-saving fixed deposit
The set of documents listed below is required to enter into this scheme
- Aadhar Card
- Passport
- Driving Licence
- Pan Card
- Two recent passport-sized photographs
What is Post office tax saving FD?
The Indian Postal Services offer a Post office tax-saving fixed deposit that aims at providing tax benefits for investors under the various sections of the Income Tax Act. The scheme applies to every Indian citizen considering a conventional option to save taxes. There are several other post office tax saving schemes that individuals can enrol into, such as public provident fund, National Savings Certificate (NSC), post office savings account, Sukanya Samriddhi account, senior citizens saving scheme and 5-year time deposit.
Conclusion
A tax-saving fixed deposit is one of the best solutions for your tax-saving needs that offers decent returns at negligible risk on your investment. With a tax saver FD, you do not have to worry about taxes, interest rate fluctuations or market volatility. Your invested amount remains secure throughout the tenure of your fixed deposit.
