In India, Tax Saving Fixed Deposits are popular investment options not just for earning assured returns but also to save on paying taxes. Fixed Deposits come with tax benefits and these tax Saving FDs are one of the safest investment options available. This article will discuss the benefits of tax Saving FDs and how to save tax on interest earned on an FD.
What is a Tax Saving FD?
A Tax Saving FD is a fixed deposit scheme with a lock-in period of 5 years (which can be extended), and a fixed interest rate. The interest earned on these deposits is eligible for tax deductions for 5 years.. The minimum investment amount for Tax Saving FDs depends on bank to bank, but it is usually Rs. 10,000. The interest earned on a tax-saving FD is also taxable, and TDS (tax deducted at source) is applicable on interest income exceeding Rs. 40,000 in a financial year.
Benefits of a Tax Saving FD:
- Guaranteed Returns: Tax Saving FDs offer guaranteed returns, which means you know how much you will earn in the form of interest at the end of the lock-in period.
- Tax Benefits: One of the most prominent advantages of Tax Saving FDs is their tax benefit. The interest earned on these deposits is also eligible for tax deductions. This deduction comes under section 80C of the Income Tax Act, 1961.
- Safe Investment: Tax Saving FDs are one of the safest investment options as the government backs the scheme. The principal amount invested in these deposits is secure, and there are guaranteed interest earnings.
- Flexible Investment Tenure: The lock-in period for Tax Saving FDs is five years. However, some banks offer a flexible tenure option where you can choose the tenure according to your needs.
- Loan Against FD: You can avail of a loan against your Tax Saving FD. It means you can use your Tax Saving FD as collateral and avail of a loan at a lower interest rate. The interest rate on loan is usually 1% to 2% higher than the interest rate offered on the FD.
- Nomination Facility: You can nominate a person who will receive the deposit amount in case of your demise. You can add or change the nominee at any time during the tenure of the deposit.
- Auto-Renewal Facility: Some banks offer an auto-renewal facility where your Tax Saving FD will be renewed automatically at maturity. It means you don’t have to worry about manually renewing the FD.
How to save tax on FD interest?
- Invest in Tax Saving FDs: As discussed earlier, the interest earned on Tax Saving FDs is eligible for tax deductions. It means you can save up to Rs. 1.50 lakh in taxes annually by investing in Tax Saving FDs. You can invest in Tax Saving FDs through your bank or post office.
- Keep track of Your Investments: It is essential to track your Tax Saving FDs and their maturity dates. It will help you plan your finances and take advantage of all tax-saving opportunities.
- Consider Taxation on Maturity: While the interest earned on Tax Saving FDs is eligible for tax deductions, the final amount is taxable. It means you must pay tax on the amount you receive at maturity. You can, however, reinvest the maturity amount in another Tax Saving FD to continue availing of tax benefits.
Tax Saving FDs are an excellent investment option for individuals looking to save taxes in interest earned. By investing in a Tax Saving FD, you can benefit from the tax deduction. Not only this, but you also take advantage of secured returns.
In addition, taking a loan against your Tax Saving FD provides an excellent opportunity to access funds when needed. However, it is important to note that these FDs carry a lock-in period of 5 years, meaning you can only withdraw your investment after the completion of the tenure.
So, why wait? Explore the benefits of Tax Saving FDs and start investing in them today!
Pankaj Tripathi is a content marketer with over 6 years of experience. With experience in the industries of B2B SAAS, e-commerce, and the hospitality sector, Pankaj brings a wealth of knowledge to his writing. In his initial role, he supported over 100 writers in creating content for diverse fields such as finance, medicine, insurance, and media and publications.