Tax Saving FD - Tax Saving Fixed Deposit for Section 80C Deductions

What is Tax Saving Fixed Deposit?

Every year, taxpayers actively seek out investment avenues to optimize their tax savings. Options such as Life Insurance, Health Insurance, and Home Loans offer avenues for claiming tax deductions. However, one of the most effective ways to minimize taxable income is by investing in Tax Saver Fixed Deposits (FDs), where investing Rs 1,50,000 can lead to significant tax savings.

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.

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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.

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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.

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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

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Who should invest in a Tax Saving FD?

• Individuals and Hindu Undivided Families (HUFs)
• You can invest in a tax saving FD through any public or private bank except cooperative and rural banks.
• An individual can hold ‘single’ or ‘Joint’ tax saving FD. Incase of ‘Joint’ mode, only the first holder can avail of tax benefits.
• Time deposit in a post office for 5 years qualifies as a tax saving FD.

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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%.

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How can you save tax with a Tax Saving FD Account?

As a working professional with an annual income of Rs 12,00,000 falling under the 30% tax slab according to the old tax regime, your tax savings calculation upon investing Rs 1,50,000 in a Tax Saving FD would be as follows:

Tax rate at 30% on Rs 1,50,000 is Rs 45,000. Additionally, the Education Cess at 4% on Rs 45,000 amounts to Rs 1,800. Hence, you can claim a total tax deduction of Rs 46,800 in a year.

It's important to note that this calculation is applicable under the old tax regime for the financial year 2019-20. Individuals opting for the new tax regime introduced in the Union Budget for FY 2020-21 onwards do not have access to exemptions claimed under section 80C. Terms and conditions apply.

Navigating the complexities of tax-saving investments can be daunting, especially when aiming to maximize savings within the legal framework. At Tax2win, our experts specialize in guiding individuals through the intricacies of tax-saving investment, book your consultation today and select the right investment based on your income and risk appetite.

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Comparison With Other Tax-Saving Investments

Under Section 80C of the Indian Income Tax Act, taxpayers have the opportunity to avail tax benefits on specific expenditures and investments. Two popular investment avenues covered under these provisions are Equity Linked Savings Scheme (ELSS) mutual funds and tax-saving Fixed Deposits (FDs). Both options offer tax deductions of up to Rs. 1.5 lakh annually, yet they come with distinct characteristics, goals, risks, and potential returns, allowing investors to tailor their investment strategy based on their financial objectives and risk appetite.

Equity Linked Savings Scheme (ELSS) Mutual Funds:

• Objective: ELSS mutual funds primarily aim to generate wealth over the long term by investing predominantly in equity and equity-related instruments.
• Risk: As these funds invest in the stock market, they carry market risk, which means their returns can fluctuate based on market conditions. However, the long-term horizon typically helps mitigate short-term volatility.
• Returns: ELSS funds have the potential to offer higher returns compared to traditional tax-saving instruments like FDs due to exposure to equities, but they also come with higher volatility.
• Lock-in Period: ELSS funds have a lock-in period of three years, which is relatively shorter compared to other tax-saving instruments.

Tax-Saving Fixed Deposits:

• Objective: Tax-saving FDs provide a fixed rate of return over a fixed tenure, making them suitable for investors seeking stable returns with capital protection.
• Risk: These deposits carry minimal risk as they offer a fixed rate of return, making them suitable for conservative investors who prioritize capital preservation.
• Returns: Tax-saving FDs typically offer lower returns compared to ELSS funds as they invest in fixed-income instruments. However, the returns are predictable and stable.
• Lock-in Period: Tax-saving FDs have a lock-in period of five years, which is longer compared to ELSS funds.

Choosing between ELSS mutual funds and tax-saving FDs depends on factors such as risk tolerance, investment horizon, and financial goals. It's advisable for investors to consult with an online CA consultant to determine the most suitable investment strategy based on their individual circumstances.

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