Why a Fixed Deposit is a Good Tax Saving Tool

If you are looking for some tax-saving investments and are confused about where to put your money, a tax saving Fixed Deposit (FD) is a great option. As the financial year is coming to a close, more and more people are looking at ways to save tax in a safe investment.  There are a number of options available out there and choosing one can become a daunting task, especially if you not very financially savvy. There are a number of reasons why you should choose an FD or a term deposit over other types of investments. An FD is a rather simple financial instrument to understand and is not as complex as other types of financial instruments. Also, there is close to no risk involved in investing in this type of deposit scheme. Read on further to understand what a tax saver FD is, how to apply for one and also the benefits that you will be entitled to.

Before moving further, let us first understand what a fixed deposit is.

What is a fixed deposit?

A fixed deposit is a type of investment plan where a certain set sum of money is put aside for a predetermined period of time. The money earns a percentage of interest. In simple words, the bank or financial institution, pays you interest for keeping your money.

Now, let us understand what a tax saver FD is.

A tax saver FD is very similar to a normal FD but it comes with a minimum lock in period of 5 years. There are some other features that are also different in this type of fixed deposit. For example, you cannot make a premature withdrawal in this type of time deposit or take a loan on the same. All investors can claim a tax deduction under Section 80C of the Income Tax Act. Let us read further to understand the features and benefits of tax saver FDs.

Reasons to choose a tax saver fixed deposit:

• Those holding this type of term deposit can claim tax deduction for upto Rs.1.5 lakh under Section 80C of the Income Tax Act in India

• The principal invested is completely exempt from tax

• This type of investment is very safe and investors will get guaranteed returns and there is almost no element of risk involved

• A fixed rate of interest is paid and there are no fluctuations or changes

• A tax saver FD comes with nomination facility

• All bank FDs are insured for a minimum sum of Rs.1 lakh

• Customers can choose from a wide range of interest payout options

• The interest rate on an FD is much higher than that offered on a savings account

Things you must know about tax saving FDs:

• Lock-in period: The minimum tenure for this type of term deposit is 5 years and not lesser. All investors will have  put in their money for this duration and the funds will be locked in. You cannot avail a loan or credit card against this type of investment option unlike traditional FDs.

• Interest earned is taxable: Please note that the interest that is earned on such term deposits are not exempt from tax. Most people have the misconception that the interest is not subject to tax and are rather shocked to see their deposit amount at the time of maturity. This means that if you earn more than Rs,10,000 as interest in  a given financial year, Tax Deducted at Source (TDS), will be automatically deducted from the interest income. A good way to avoid TDs is to make sure you split your bank FDs or invest in the middle of the financial year.

• No loan or overdraft facility: Unlike other types of fixed deposits where you can apply for a loan or overdraft of up to 90% of the deposit value, this facility cannot be availed on tax saver FDs.

• Tenure ranges: While the minimum investment tenure is 5 years, most banks offer a maximum tenure of 10 years for these types of deposits. If you want to invest for a longer duration, you will have to close the term deposit after the maturity period and renew the same for any period between 5 years to 10 years.

• Higher interest rates for senior citizens: The biggest advantage about time deposits is that senior citizens are eligible for a higher rate of interest. Most banks give those above 60 years an additional interest in the range of 0.25 to 0.50%.

How to apply for a tax saving FD?

It is very easy to invest in a tax saving FD. You can visit your nearest branch, fill in the FD application form and submit a cheque. Apart from this, you can also open an FD with your bank online if you already have an active internet banking account with a username and password. This is a faster method and all you have to do is fill out details, choose the type of time deposit that you want, select the account and choose the bank account from which money needs to be debited for the FD. This way, you can open an FD account within a few hours and will not have to bother physically visiting your bank branch.

Interest rates on tax saver FDs

The interest rates paid for these type of time deposits will be same rate as that applicable for the tenure ranging anywhere between 5 years to 10 years. Let us take a look at some of the top bank Tax saver FD interest rates: