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Fixed deposits are a popular investment option in the country, with banks offering a range of schemes specially designed to benefit customers. A fixed deposit is typically used as a savings cum growth instrument and can be an excellent way to get the most out of your money. As taxpaying citizens, most of us feel the pinch of paying tax but investing in fixed deposits could help you a decent amount of tax.
Tax saver fixed deposit (FD) is a type of fixed deposit, by investing in which, you can get tax deduction under section 80C of the Indian Income Tax Act, 1961. Any investor can claim a deduction of a maximum of Rs.1. 5 lakh by investing in tax saver fixed deposits.
- Lock-in period of 5 years
- Interest earned is taxable
- Rate of Interest ranges from 5.5% – 7.75%
Tax Benefits under Section 80C of the IT Act:
Section 80C of the Income Tax Act contains provisions for tax deductions from the gross total income of taxpayers. Individuals who have fixed deposit accounts are entitled to deductions up to Rs 1.5 lakh on the amount invested by them in FDs. While this section contains provisions for a number of investments, taxpayers with only fixed deposits investments can also use it to its fullest. The amount deposited into a FD can be claimed as deductions, subject to a maximum of Rs 1.5 lakh a year.
Eligibility to claim Tax Deductions:
The following are eligible to claim tax deductions on fixed deposits.
- Individuals who have a fixed deposit in their own name
- Hindu undivided families
Points to be aware:
1. Only Individuals and HUFs can invest in tax saving fixed deposit (FD) scheme.
The FD can be placed with a minimum amount which varies from bank to bank.
3.These deposits have a lock-in period of 5 years. Premature withdrawals and loan against these FD’s are not allowed.
4. A person can invest in these FD’s through any public or private sector bank except for co-operative and rural banks.
5. Investment in Post Office Time Deposit of 5 years also qualifies for deduction under section 80 (C) of the Income Tax Act, 1961.
6.Post Office Fixed deposit can be transferred from one Post office to another.
7. One can hold these FD’s either in ‘Single’ or ‘Joint’ mode of holding. In the case the mode of holding is joint, the tax benefit is available only to the first holder.
8. The interest earned is taxable as per the investor’s tax bracket and therefore, TDS is applicable. The interest on deposits is payable on either monthly/quarterly basis or can be reinvested. A person can avoid TDS deduction on the interest earned by submitting Form 15G (or Form 15H for senior citizens) to the bank
9. Nomination facility is available for these FDs.
10. Most banks offer slightly higher interest rates on FDs to senior citizens (as compared to the interest rate offered on the same FD to a non-senior citizen). This interest rate differential exists for tax saving FDs also.
Are Fixed Deposits valid for Tax Exemption?
As per the government and the announcement made by the Finance Ministry in 2006, an investment made in a tax saving fixed deposit which has a minimum of 5 years lock-in period is valid and eligible for a tax deduction as per section 80C of the Income Tax Act of 1961. The fixed deposit will need to follow the below mentioned guidelines to be eligible:
- The deposit maturity will need to be a minimum of 5 years, but it can be extended, to a period of up to 10 years, depending on the bank.
- The minimum amount under this deposit should be Rs. 100 and multiples thereof
- The maximum amount under the deposit should be Rs. 1.5 lakhs per year.
- The deduction is available for only individuals and Hindu Undivided Families
- There will be no premature withdrawal for these fixed deposits.
- These fixed deposit will also not have any loan facility attached to them
- TDS will be charged under this deposit, on the interest earned by the deposit if it is over Rs. 10, 000 for a year. The TDS will be paid at the end of the financial year.
The tax saving fixed deposits can be made in either a single or joint name, in case the wherein the tax saving fixed deposit are made in a joint account only 1 of the holders can claim the deduction as per section 80C of the Income Tax Act 1961.
Amount of Tax Deduction Permitted:
Account Holders can claim a maximum deduction of Rs 1.5 lakh from their gross taxable income. It should be remembered that this amount is a cumulative addition of all the deductions permitted under Section 80C and not on fixed deposits alone.
Benefits of Tax Saving Fixed Deposits
Fixed Deposit is a financial tool that has enjoyed iron-clad trust of the general population since decades, when it comes to savings. Since it is a bank-based investment product, closely monitored by RBI, investors are assured of its safe and low-risk nature. The money deposited is safe and is easily redeemable with interest once it reaches maturity.
- FD has a higher interest-earning potential than savings account
- FD allows only a one-time lump sum deposit
- TDS from the interest on FDs is applied
- Flexibility in the amount and tenure for investors
- Get tax deduction up to Rs.1, 50,000 under Sec 80C
- It is easy to get loan on the FD amount for lesser interest
- Premature withdrawals are not available
Advantages of the Fixed Deposits
1. Easy Availability
The Fixed Deposit scheme is available to all the public and private sector banks in India. You can open the FD, through internet banking as well. There is no need to go to the bank for opening FD if you have the KYC or “Know Your Customer” formalities done at the bank.
2. FDs open for to all
The FD has a wide and accommodative canvas. It is open to the individuals, private companies, public companies, the partnership firms, trust, societies, HUFS, NRIs, and others. Hence anyone can deposit money in an FD account and reap the tax exemption advantages.
3. Guaranteed Returns
FD offer greater interest than the saving accounts. The rate varies between 7 % to 8 %. The interest gains of an FD also vary with its tenure, so that a long-term FD accrues better interest gains. The fixed deposit interest rate comparison charts, available online, will reveal to you which bank is offering the greatest of returns.
4.Tax Exemption
The original monetary amount, which the depositor deposits in the FD, is exempt from taxation, under the Section 80C of the Income Tax Act. FDs are a widely used tax saving option by both salaried individuals and workers, and the business persons. The section offers an exemption of up to Rs 1.5 lakhs, towards an FD deposit.
Note: In order to save taxes, you should deposit the FD for a minimum period of 5 years. The maximum deposit limit, relating to tax exemption is Rs 1.5. lakhs.
5. Security
FD investments are totally secure. No market fluctuation can affect the interest rates, as in the case of the Mutual Funds, and other market related financial schemes. The interest rate for an FD scheme also remains fixed during a given time period, until it reaches its maturity.
6. Automatic Renewal
FDs can also be renewed automatically. You do not even need to go to the bank for its renewal, as it can be managed through the internet banking.
7. Loan Facility
An FD can also be used for getting a loan. The loan facility helps the depositor to get the finances when he or she requires them. The loan may extend up to 90% of the principal and the interest that has been accrued on it.
8. Time Span
While an FD can be made for a period of a week as well, it can have a tenure of up to 20 years. Hence they are fine financial instruments towards making savings for old age, education, marriage, and other purposes.
9. Option of Opening Single or Joint Account
Two or more individuals can open FD together, through a joint account. Any of the account members can deposit, or withdraw money from the account. This makes the FD accounts easier to operate and maintain.
10. For HUFs
The members of any Hindu family can together form an HUF or Hindu Undivided Family, and open a Fixed Deposit. As HUF is taxed separately (from the individual members of the family), a family can save more on taxes by opening an HUF FD account.
11. For NRIs
NRIs can also open the FDs or Fixed deposit account and can invest in it by depositing INR, or any other foreign currency. The banks in India offer the customized FD plans for the NRIs, and some of them are non-taxable. For instance, the NRE (Non-resident External) account in India, opened by an NRI is not taxed upon by the Government of India. These accounts offer benefits including:
- A rupee FD for the foreign earnings
- All interest earned on the account is exempt from taxation
- The interest accrued at the maturity of the FD is fully repatriable
- NRIs can also take loan on the NRE FD account
12. FDs are Transferrable
The FD accounts are transferable, in that they can be transferred from one branch of a given branch to another.
How to Claim Tax Benefits?
Account Holders can claim the deductions under Section 80C of the IT Act when they file their income tax returns for a particular year. Supporting documents and relevant forms need to be filled out in the case of TDS as well and one should ensure that all information provided is accurate and up-to-date.
When to Claim?
Tax deductions under Section 80C can be claimed during a financial year only, i.e. if an individual opens a FD in June 2015, he/she can claim deductions for the financial year 2015-16 only. While there is no fixed time period for claiming benefits on TDS, it is advisable to plan it in such a way that the interest component is split over two years, thereby eliminating the need to pay TDS.
Disadvantages of the Fixed Deposits
Interest Rate can be lower than Inflation
Sometimes the inflation rate may be even higher than the interest rate of the FD.
1.No Increase in Interests
FDs have the same interest for their complete tenure. Hence the gains are fixed and would not increase.
FDs were earlier only good for short tenure savings, but now they have much greater tenures. While there are tax-free options PPF available, FDs can also be used for short-term savings which can offer greater returns. The secure deposits provide for the tax exemptions and are especially useful for those who have a low-risk appetite but want greater interest rates.
2. Interest are Taxed Upon
All interest gained on the fixed deposits are fully taxed upon. The income is denoted under the head “Income from the Other Sources” when you file your ITR to Income Tax Returns.
There are other financial instruments available, which provide you the benefit of tax-free savings. The PPF and the government bonds are a few of them.
3. TDS Taxation
Interests gained from a FD are also charged with TDS. Banks reduce it from the interest accrued at the end of each year. However, the depositor has the option to opt out of TDS, and pay all the interest at the maturity. The form 26 AS, is linked to the PAN card of the depositor and shows all the TDS deductions made towards the FD.
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