The fixed deposit (FD) is a financial product offered by banks or non-bank financial organisations until the maturity date that pays a higher interest rate than a regular savings account. It might or might not be necessary to create a different account.
Fixed deposits are term deposits that pay a high-interest rate and are offered by banks. It is the most common type of term deposit; however, there are also recurring deposits and Flexi Fixed accounts. The latter is a combination of demand deposit and fixed deposit. FDs pay more excellent interest rates than savings accounts to compensate for the lack of liquidity.
For FDs, the maximum duration allowed is ten years. In general, the greater the rate of interest, the longer the term of the deposit; however, a bank may provide a lower rate of interest for a more extended period if it expects interest rates, which the Central Bank of a country lends to banks, will fall in the future.
Tax Saving FD
Tax saver FDs are a type of fixed deposit that allows the depositor to claim a tax deduction under Section 80C of the Income Tax Act of 1961 in India. Two types of accounts used to make these deposits are Single holder type deposits and joint-holder types. The tax benefit is only available to the first holder if you pick a joint manner of holding. The 5-year maturity period of the tax saver fixed deposit. The Hindu Undivided Family (HUF) and individuals are eligible for a deduction under section 80C. Everyone, even senior citizens and non-resident foreigners, is eligible for this tax break.
It’s worth noting that the interest you receive on this fixed deposit isn’t tax-deductible, and you can’t borrow against it. The interest earned on a tax saver fixed deposit can be reinvested or received quarterly.
You have the option of creating a tax saver fixed deposit with a public or private bank. However, this is not possible in rural or cooperative banks. Senior citizens typically receive a greater interest rate on tax saver fixed deposits from banks. The tax-advantaged mutual funds are known as Equity Linked Saving Schemes.
What is the difference between a regular FD and tax saving FD?
Accrued interest on tax-advantaged fixed deposits is similarly paid only at the time of maturity. Regular fixed deposit accounts allow investors to choose between monthly, quarterly, or yearly interest payments.
IndusInd Bank FD interest rate ranges from 2.75 percent per annum to 6.50 percent per annum for regular depositors. The IndusInd bank offers a variety of IndusInd Fixed Deposit programmes.
The investment is excluded from deduction under Section 80C, which is the single biggest benefit of a tax-saving fixed deposit. A regular fixed deposit, on the other hand, may provide significant returns on investment but does not provide tax benefits.
Interest earned on tax-saver fixed deposits, on the other hand, is taxable under the Income Tax Act of 1961.
To qualify for tax benefits, investors must invest between 1 and 1.5 lakh in a tax-saving fixed deposit plan for a fixed duration of 5 years. You can invest as much as you like in recurring fixed deposits, depending on your investment objectives.
With a tax saver fixed deposit, you can anticipate a five-year lock-in period (investment term that is required). Both principal and interest can be reinvested for another five years after maturity, while regular fixed deposits can be reissued indefinitely based on your needs.
Regular fixed deposits, despite being a long-term investment instrument, can be liquidated in whole or in part if you need cash. Termination or withdrawal of tax-saving fixed deposits before liquidity is not feasible under any circumstances.
Features of a Tax Saving FD
- A tax saving FD allows you to take advantage of the income tax exemption provided by Section 80C of the Income Tax Act of 1961. On investments of up to Rs 1.5 lakh, a fixed deposit income tax exemption can be claimed.
- There is a five-year lock-in term.
- Interest earned on a Tax Saving Fixed Deposit is taxable and must be deducted at the source.
- A Tax Saving FD does not allow for early withdrawals, loans, or overdraft (OD) capabilities. Regular Fixed Deposits will enable you to borrow money against your deposits.
- Tax Saving Fixed Deposits do not have an auto-renewal feature.
- Money payments are variable; you can choose to receive them monthly, quarterly, or annually, or you can reinvest the interest in the principle.
- Tax Saving FD interest rates remain constant over the five-year period.
- Interest rates vary by bank, and rates for Indian citizens and Hindu Undivided Families (HUF) also range.
- Tax saving FDs can be owned individually or jointly. Only the first account holder gets tax benefits if it’s a combined Tax Saving Fixed Deposit.
The equity-linked savings plan (ELSS) and the Public Provident Fund are the two most prevalent ways to claim an income tax exemption under Section 80C. (PPF). A Tax Saving FD has one significant advantage over an ELSS as it is not market-linked. While ELSS has a shorter three-year lock-in period, it requires a minimum investment of Rs 500. Also, because it is market-linked, ELSS carries some risk. A Tax-Saving Fixed Deposit requires a minimum investment of Rs 100. While you can create a PPF account with as little as Rs 100, you must invest a minimum of Rs 500. A PPF also comes with a 15-year lock-in period.
Who should consider a tax-advantaged FD?
Before making any investment decisions, consider your age, risk appetite, and investment horizon before making any investing decisions.
- You’re nearing retirement and have a risk tolerance of zero to one percent: A Tax Saving FD is an attractive option for you since it offers assured profits and little risk. You can examine the interest rates on Tax Saving FDs and choose the one that best suits your investing needs.
- If you want to save money on taxes, you can use Section 80 C to claim a Fixed Deposit income tax exemption.
- If you want guaranteed earnings, little risk, and growth, a Fixed Deposit is a fantastic investment option. A Tax Saving FD takes things a step further by allowing you to claim a Fixed Deposit income tax exemption under Section 80 C of the Income Tax Act for investments up to Rs 1.5 lakh. A five-year lock-in term and a minimum deposit requirement of Rs 100 apply to a Tax Saving Fixed Deposit. You can research interest rates for a Tax Saving FD and invest your money safely and securely.