Fixed Deposits: Tax Saving FD for 80C Deductions
Fixed deposits have always been one of the most favored safe and trusted investment options among conservative investors. Apart from providing safety and assured returns, fixed deposits also offer tax-saving benefits under Section 80C of the Income Tax Act. These tax-saving bank FDs are excellent investments that reduce your taxable income and return your money with interest. In this article, we will walk you through how tax-saving fixed deposits work, their multiple benefits, eligibility criteria, and what makes them a must-have option in your tax planning toolkit.
Table of content
What are Tax Saving Fixed Deposits?
Tax-saving FDs are those fixed deposit schemes offered by banks that help investors get deductions on their total taxable income for that amount under Section 80C of the Income Tax Act. Interest on these types of FDs attracts tax. However, only the principal amount invested is eligible for tax deduction.
Salient features of Tax Saving Fixed Deposits:
Lock-in Period: Tax-saving FDs have an integral element of a compulsory 5 year lock in, wherein the amount is locked up and cannot be withdrawn back by the investor.
Tax Deduction: All investments in such FDs enjoy deductions up to a maximum limit of INR 1.5 lakh per annum under Section 80C.
Interest Rates: Interest rates for tax-saving FDs are almost the same as the regular fixed deposits that banks offer, although it might differ a bit based upon the respective bank's policies.
Minimum/Maximum Limit: Though there is no minimum limit to invest, the maximum limit for claiming tax deduction is INR 1.5 lakh in a financial year.
Account Holding: They can be held singly or jointly. However, the first holder only gets the tax benefit under Section 80C in case of a joint account.
Tax Saving Fixed Deposits vs Regular Fixed Deposits
While both tax-saving and regular fixed deposits are similar, offering a safe investment avenue with a fixed interest rate, there are several distinctions due mostly around the terms of liquidity and tax benefits:
Liquidity: While regular FDs are most liquid, with varying tenures and even the possibility of breaking them in case such a huge amount of funds is needed by the depositor, tax-saving FDs come with a lock-in period of 5 years that cannot be broken under any circumstance.
Tax Benefits: The major difference is in the area of tax benefit. The regular FDs do not offer any tax deduction on the investment amount, though they too are safe and stable in nature. Again, the interest earned on regular FD is taxable according to the individual's tax slab, while the principal amount invested in tax-saving FD is deductible under Section 80C.
Interest Payout: A regular FD has interest payout options such as monthly, quarterly, or on maturity. The tax-saving FD compounds the interest till maturity. However, there might be certain institutions that allow variation in this respect.
Eligibility Criteria for Tax Saving Fixed Deposits (FDs)
Tax-saving fixed deposits offer a secure way to save money while reducing the tax liability under Section 80C of the Income Tax Act. Let's look at the eligibility criteria for opening a tax-saving fixed deposit:
Who Can Open a Tax-Saving Fixed Deposit?
Any Individual: Any resident Indian person can open a tax-saving fixed deposit account. It includes both employed and self-employed people who look forward to availing tax benefits under Section 80C.
Hindu Undivided Families (HUFs): It is possible for HUFs to invest in tax-savings FDs in the name of the HUF and claim tax deductions as available.
Joint Accounts: Joint accounts can be opened, but the tax benefit would subsist under Section 80C only for the first holder of the deposit. The other account holders do not get any tax benefit from the same FD.
Minimum Investment:
The minimum amount required to open a tax-saving FD varies across banks. However, most banks allow opening its tax-saving bank FD with as low as INR 100 or INR 500. One should check with banks about their minimum deposit requirements.
Maximum Investment:
The maximum that can be invested in tax-saving FDs in a financial year is INR 1.5 lakh. This is the maximum amount eligible for tax deduction under Section 80C of the Income Tax Act, combining all investments and expenditures that are allowed deductions.
Any amount invested in excess of INR 1.5 lakh in tax-saving FDs shall not attract any additional tax benefits, even though it will continue to earn interest at the agreed rate.
Other Considerations
Age Restrictions: Usually, there is no minimum or maximum age to open a tax-saving FD. But, minors cannot usually open such accounts in their own name. A guardian has to open the account on their behalf.
NRIs: Tax-Saving fixed deposits cannot be opened by NRIs. These fixed deposits are only for resident Indians under the Income Tax Act.
Tenure: Tax-saving FDs have a lock-in period of 5 years. No premature withdrawal is allowed in such accounts, making this fact a crucial one before investing in them.
Tax Benefits Under Section 80C
Out of all the sections, Section 80C of the Income Tax Act is one by which most people try to save tax through many types of investments and expenses. Thorough knowledge of this section is essential for better management of taxes.
Section 80C of the Income Tax Act
Section 80C allows individual and Hindu Undivided Families (HUFs) to have deductions from their total income by investing and spending money in some specified areas. It allows deductions for various kinds of investment, such as PPF, PF, NSC, payment of life insurance premiums, tuition fees paid for any purpose, money invested in specific mutual funds, and tax-saving fixed deposits.
How Tax-Saving FD Investments Can Help Lower Taxable Income
Tax-saving fixed deposits prove to be a popular choice under Section 80C because they are easy to buy and investment security is guaranteed. Here is how they work toward reducing taxable income:
Qualifying Investment: When you invest in a tax-saving FD, the amount deposited by you up to the allowable limit qualifies for deduction from gross total income while arriving at taxable income.
Tax Liability Reduction: The lesser the quantum of income that is taxable, the lesser will your overall tax liability be. For example, if you fall under the 30% tax bracket and you invest INR 1.5 lakhs in a tax-saving FD, you are likely to save INR 45,000 in taxes.
Long-term Commitment: Since the lock-in period of the tax-saving FD is 5 years, the money stays invested for a longer period of time and may align with long-term financial goals like retirement planning or funding higher education of children.
Maximum Deduction Available Under Section 80C and its Limitations
Maximum Deduction Limit: The maximum limit of deduction under Section 80C is INR 1.5 lakh for a financial year. This should be considered in totality, and not only the tax-saving FDs, with all such investments and expenses taken together.
Aggregation of deductions: It has to be noted herein that the limit of INR 1.5 lakh is aggregating in nature across all Section 80C investments. If you are also contributing to a PPF, pay any premium of life insurance or incur tuition fees eligible under 80C, then all these amounts in aggregation should not be more than INR 1.5 lakh to get the benefit of deduction.
No Partial Withdrawal: Due to the lock-in period, no funds invested in tax-saving FDs can be withdrawn prematurely, sometimes restricting liquidity.
Features and Terms of Tax Saving Fixed Deposits (FDs)
Tax-savings fixed deposits are one of the most exciting investment instruments under Section 80C of the Income Tax Act, for the simple reason that they offer a safe route for investment and, at the same time, come with tax benefits. Here are the key features and terms associated with these FDs:
Key Features
Lock-in period: Tax-saving FDs have a 5-year lock-in period. Hence, investors cannot withdraw their funds during this period, unlike regular FDs that may be more liquid.
Interest rates: The interest rates in tax-saving FDs are more or less at par with regular fixed deposits but may differ across banks. They usually tend to be higher than those of savings accounts and easily attract those seeking good returns that follow systematically. Please note that though the rates are fixed for the term at the time of opening the FD, they are otherwise subject to variations in economy and the bank's policies.
Minimum and maximum investment: The minimum amount required for opening a tax-saving FD varies from bank to bank but is usually easily available and mostly starts as low as INR 100. The maximum amount to be invested under Section 80C for tax deduction is INR 1.5 lakh per financial year.
Interest taxation: Interest earned from tax-saving FDs gets taxed under the head "Income from Other Sources". The incidence of tax is according to the investor's income tax slab. Even though the principal amount gets a deduction under Section 80C, the interest income does not.
TDS on interest: Moreover, interest earned if it crosses the threshold limit is always subjected to TDS. Still, investors can claim TDS exemption by submitting Form 15G or Form 15H in the case of senior citizens whose total income is less than the exempted taxable limit.
Terms of Investment
Types of Account Holders: It can be opened by both individuals and HUFs. Joint accounts can be opened, although the tax benefit under Section 80C will lie with the first holder.
Premature Withdrawal: A tax-saving FD cannot be withdrawn prematurely before the lock-in period of 5 years. It is another critical condition which investors in dire need of liquidity have to consider.
Loan against FD: Loans against tax-saving FDs cannot be availed throughout the lock-in period unlike regular FDs which mostly come with this kind of facility.
Renewal and Auto-Renewal: Automatic renewal is not one of the usual features of such FDs. At the end of 5 years, these FDs mature, and the funds get normally disbursed to the account holder or the deposits need to be renewed or reinvested manually.
Mode of Holding: These FDs can be held either in single or joint form. In case of a joint holding, the tax benefit is applicable only to the first holder.
Pros and Cons of Investing in Tax Saving Fixed Deposits (FDs)
Tax-saving Fixed Deposit (FDs) is one of the most sought-after options among conservative investors when it comes to saving taxes under Section 80C of the Income Tax, 1961. As with any other financial product, tax-saving FDs also have their pros and cons. Given below is a balanced view of those factors that might help you decide whether they fit your investment profile.
Advantages of Tax Saving FDs
Capital Security: Tax-saving FDs are considered one of the most secure modes of investment, absolutely backed by banks and not volatility-based like mutual funds or stocks. The amount of principal one invests is safe and is not at risk.
Fixed Interest Rates: At the time of opening of your FD, the interest rate remains constant throughout your duration of 5 years. The interest rates are hence known to you very well as to how much you take at maturity. It, therefore, gives you predictability, a big plus for planning your finances.
Tax Benefits: As per Section 80C, investment in tax-saving FDs is deductible from your gross total income up to a limit of INR 1.5 lakh per annum, which could reduce your taxable income and hence your tax liability.
Simple Procedure: Opening a tax-saver FD is simple, involving minimal paperwork, especially if you happen to be an existing customer of the bank. It can also be done online, making it convenient for most investors.
Disadvantages of Tax Saving FDs
Lower Liquidity: The lock-in period of 5 that may be compulsive and might not provide for withdrawal of this investment in case you face any kind of financial emergency. You can't make a withdrawal during this time that could quite turn out to be a major obstacle to liquidity. It is likely to have lower interest rates comparative to other schemes.
Comparative Returns: Though interest rates for tax-saving FDs remain stable, they can be lower than the returns on other tax-saving instruments such as ELSS or PPF with the potential to offer better yields, carrying a higher associated risk.
Interest is Taxable: While the principal remains exempt, the interest on tax-saving FDs gets taxed as income tax according to your slab. This does reduce the effective rate of return, especially for higher tax bracket investors.
No Loans or Overdrafts: Unlike regular FDs, Tax-Saving FDs are not used as collaterals to secure loans or overdrafts during the lock-in period. This reduces its utility in financial planning.
How to Open a Tax Saving Fixed Deposits (FDs)?
Opening a tax-saving fixed deposit requires very minimum hassle, yet it can bring substantial savings in taxes under Section 80C of the Income Tax Act, 1961. Here is a step-by-step guide on how to open a tax-saving FD, the required documents, and some tips while selecting the bank or financial institution.
Step by Step Process to Open Tax-Saving Fixed Deposit
Choose Your Bank: Select a bank that best fits the interest rates offered, services provided, and your personal preference for banking. Most of the banks that offer regular FD also offer tax-saving FDs.
Visit the Bank or Go Online: You can open a tax-saving FD either by visiting a branch or through online banking if the service is available. Online banking often provides an easier and quicker way to open FDs without visiting the branch.
Fill Up the Application Form: The applicant has to fill up the form for FD provided in the branch or fill it up online. The applicant must mention in the application form that the deposit is for tax saving FD under Section 80C.
Submit the Required Documents: Submit the appropriate documents for timely processing of FD application:
Make the Deposit: Decide on an amount you can deposit, subject to the maximum limit under Section 80C, which is INR 1.5 lakh. The amount deposited will be locked in for 5 years. Pay the amount appropriately online if you are processing this online, or visit the branch to make the deposit.
Acknowledgement Receipt: After processing your FD, the bank will issue a receipt or certificate mentioning the deposit amount, date, maturity amount, rate of interest, and maturity date. Keep it safe as it is required for your tax records.
Comparing Tax Saving FDs with Other Section 80C Investments
There are plenty of options under Section 80C of the Income Tax Act for everyone to save taxes. Each of these options comes with its own features, risks, and benefits. Given below is a detailed comparison of some popular Section 80C investments, including equity-linked savings schemes, the public provident fund, national savings certificate, life insurance, and tax-saving fixed deposits.
Tax Saving FD vs ELSS
Risk and Return: Tax-saving FDs provide returns that are fixed and guaranteed in nature. Though the rates offered are slightly lower compared to ELSS, they are equity-linked and hence, at best, carry the potential to yield very high returns with increased volatility and higher risk.
Liquidity: Though tax-saving FDs come with a lock-in period of 5 years, under ELSS, it is 3 years only, but the former does not have a premature withdrawal option either.
Tax Treatment: Interest from tax saving FDs is subject to tax at the individual's tax slab. Interest income from ELSS, though, is absolutely tax-free under current legislation.
Tax Saving FDs vs PPF
Return: PPF has an interest rate that is more attractive as compared to FDs at most times, and the returns come absolutely tax-free.
Liquidity: PPF has a maturity period of 15 years with options of partial withdrawal from the 7th year onwards. Therefore, it can be said to be comparatively less liquid than tax-saving FDs.
Safety: Both are safe with PPF giving sovereign guarantee, but making it very slightly safer on account of credit risk.
Tax Saving FDs vs NSC
Return: Compared with tax saving FDs, NSC is offering a slightly higher interest rate. Coupled with this the interest on NSC is compounded annually and also this interest is eligible for tax deduction as it is reinvested.
Liquidity: Though NSC also has a maturity period of 5 years similar to tax saving FD, but here the rule of premature withdrawal isn't applicable.
Tax Treatment: Interest from NSC is taxable, though it is deemed to be reinvested every year except the last year and qualifies for a fresh deduction under Section 80C.
Tax Saving FDs vs Life Insurance
Purpose: While tax saving FDs are purely the investment product, life insurance provides financial protection along with an investment benefit.
Returns: The returns on life insurance policies vary significantly but are largely lower than other investment-oriented products unless they have an equity linkage.
Liquidity: The term period of life insurance policies is usually much longer and there are significant losses if one surrenders them early.
FAQ
Q1. What is a tax-saving fixed deposit?
Tax-saving FD is a deposit that offers deductions on taxes under Section 80C of the Income Tax Act for 5 years. The amount invested, up to a maximum limit of INR 1.5 lakhs, shall be allowed as a deduction from total taxable income.
Q2. Who can invest in tax-saving FDs?
Any resident individual or Hindu Undivided Family (HUF) can invest in tax-saving FDs.
Q3. How much can I invest in tax saving FDs for tax benefits?
You can invest up toINR1.5 lakh in a financial year in tax saving FDs and it shall be eligible for deduction under Section 80C.
Q4. Are the interest earnings from tax saving FDs taxable?
Yes, the interest earned on tax saving FDs is taxable according to your income tax slab rates. The interest will be added to your total income and taxed accordingly.
Q5. Can I break my tax saving FD before the maturity period?
No, there is a lock-in period of 5 years necessarily attached with tax saving FDs, and you can't withdraw the money before maturity.
Q6. Can I open a tax saving FD in a joint name?
Yes, you can open a tax saving FD in a joint name. However, only the first holder of the deposit gets the tax benefit under Section 80C.
Q7. How are tax saving FDs different from regular FDs?
Tax saving FDs belong to a different category from regular FDs in their basic features: lock-in period, tax benefits, and so on. While regular FDs can have flexible tenures and/or allow premature withdrawals, tax saving FDs have a fixed tenure of 5 years with restrictions on premature withdrawal but offering tax benefits under Section 80C.
Q8. What if the tax saving FD holder passes away before maturity?
In case of the death of the depositor, the nominee or legal heirs can claim the deposit before the date of maturity. The account will be closed and disbursement of amount will happen subject to norms of the respective bank.
Q9. Can I take a loan against my tax saving FD?
No, loans against tax saving FDs are not allowed due to the lock-in period requirement.
Q10. How do I open a tax-saving FD, and what documents are required?
You can open a Tax Saving Fixed Deposit by visiting a bank branch or any online banking service available. You have to fill in the application form with the proof of your identity like a PAN Card, address proof, and other KYC documents.
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