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Tax saving FD

Updated on: 31 Jan, 2023 05:22 PM

Fixed deposits is a term you must have heard for generations. Fixed deposits were always considered the best saving option for Indians. The logic behind Fixed Deposit was that it is not dependent on market variations and has a constant interest rate guaranteed at the time of maturity. The same logic implies tax saving too. Under a tax saving FD account, investors deposit a lump sum amount over a period and receive a return with a fixed interest rate throughout the investment tenure.

What is Tax Saving Fixed Deposit?

A Tax saving FD or an investment in fixed deposits offers you a higher interest rate than a regular savings account. FD is a financial instrument offered by banks and NBFCs. A tax saving FD is a fixed deposit under section 80 C, and individuals can claim a tax exemption of up to Rs. 1.5 lakh. These deductions are available for individuals and the Hindu Undivided Family (HUF). The lock-in period for tax saving a fixed deposit is five years.

What are the features of a Tax Saving FD?

  • Under Section 80C, with a tax saving FD, you can claim tax exemption up to Rs. 1.5 lakh.
  • Minimum Amount to invest Rs. 100 & in Multiples of Rs. 100 (varies from bank to bank)
  • The maximum amount to invest is Rs. 1.5 Lakhs (in a financial year)
  • FDs can be open through any public or private sector bank except for cooperative and rural banks.
  • A nomination facility is available.
  • The Lock-in period is five years.
  • The fixed deposit can be made through two types-Single holder Type Deposits and Joint holder Type Deposits. Though, if you take a joint holder type deposit, the tax benefit is provided to just the first holder.
  • The rate of interest ranges from 5.5% – 7.75%. The interest rates are subject to change at the discretion of the bank.
  • The interest earned from FDs is taxable.
  • Flexible interest payout – monthly, quarterly, or reinvestment in principal.

What are the benefits of a Tax Saving FD?

  • Higher interest in comparison to a regular saving account.
  • Minimal risks are attached as banks, and other financial institutions are always under the extent of the Reserve Bank of India (RBI).
  • Fixed interest rate offers constant returns as guaranteed throughout the year.
  • Senior citizens can enjoy 0.25% to 0.5% higher returns on their tax-saving fixed deposit investments than regular customers.
  • The sum received after maturity can be reinvested for another term.
  • For senior citizens, a tax deduction of Rs. 50,000 or the interest on FD whichever is lower, is allowed from the gross total income.
  • Loans against FDs are available.
  • Higher returns can be accumulated if the investment is made for an extended period.
  • Post Office Fixed Deposits can be transferred between post offices.

What are the documents required to open a Tax Saving FD account?

  • Identity Proof:-
    • PAN Card
    • Aadhaar Card
    • Driving Licence
    • Passport
    • Ration Card
    • Voter ID Card
    • Proof of age (for senior citizens)
  • Address proof:-
    • Bank Statement
    • Passport
    • Electricity Bill
    • Telephone Bill
    • ID Card / Certificate issued by Post Office
    • Voter ID Card

How to save yourself from paying TDS on FDs?

TDS applies to all interests earned in India, including FDs. If the income earned through an interest in the financial year exceeds Rs. 40,000, the applicant or account holder must pay tax at any cost. Below are the ways to save yourself from paying TDS on tax saving FDs.

  • Self-Declaration:
    If the total interest earned from FDs and the total taxable income is not more than the taxable limit of that financial year, submission of 15G or 15H is required. Form 15G is for individuals below the age of 60 years, while Form 15H is for senior citizens.
  • Managing investments better:
    The saving-investment should be made in a way that doesn’t exceed Rs. 40,000 in one year. For example, the investment in FD can be made in October as FD investment is made for a year. As the financial year ends on 31 March, the financial year will be split into two, and you can save TDS on your investment.
  • Joint Account:
    If you have opened a joint FD, the TDS will be deducted from the first applicant account when the interest income earned exceeds the limit. TDS is not deducted in the case where you are the second applicant.
  • Distributing in different banks:
    Instead of putting all amounts in one bank, it is advisable to distribute investments across various banks in such a way that interest earned from any of the FDs does not exceed the Rs. 10,000 limit.
  • Late Submission:
    If you forget to submit a self-declaration form and the TDS has been deducted. IT department will refund the TDS deducted when the return is filed by the individual, though you will have to wait until the next July, and the refund processing will take another few months.
  • PAN:
    If PAN details are not submitted, the banks will deduct TDS at a higher rate, usually 20%.

Frequently Asked Questions

Q- What is the tenure of tax saving FD?

The minimum tenure for a fixed deposit tax saving scheme is five years. However, it all varies from bank to bank.

Q- Can we break tax saving FD?

No, before the tenure of 5 years is completed, you cannot break these FDs.

Q- How much tax deduction can be claimed under tax saving FD?

Up to 1.5 lakhs per annum deduction can be claimed under tax saving FD.

Q- Is the interest received on FD after maturity tax-free?

No, the interest received is taxable.

Q- How can I open a tax saving FD?

A tax saving FD can be opened in any public or private sector bank.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.