Tax-Saving Fixed Deposits: How They Work and Benefits

Tax Saving

Did you know there exists a safe investment option which also provides you with tax savings? The Tax Saving Fixed Deposit (FD) provides assurance of returns albeit with tax benefits attached. This is a long-term investment that should be included in your investment portfolio so as to ensure a balanced portfolio. 

What is Tax Saving Fixed Deposits? 

Tax-Saving Fixed Deposits are a specialised FD scheme offered by authorised banks. These FDs come with a mandatory 5-year lock-in period and provide tax benefits under Section 80C of the Income Tax Act of 1961. Investors can claim deductions of up to ₹1.5 lakh in a financial year. However, the interest earned on these deposits is taxable as per your applicable income tax slab. 

Key Features of Tax-Saving Fixed Deposits:

  • Lock-in Period: Tax Saving FDs have a standard lock-in period of five years. During this lock-in period, the investor is not allowed to withdraw the amount invested or terminate the FD. This encourages depositors to have a longer time horizon when saving, which aligns with their financial aspirations. 
  • Tax Deduction Limit: Tax-Saving Fixed Deposits are subject to a tax deduction of up to Rs 1.5 lakh in one year, and this is a repeat investment. However, the limit includes the larger limit of Rs 1.5 lakh in Section 80 of the Income Tax Act, 1961, which allows contributions to other forms such as EPF, PPF or Mutual Funds ELSS. 
  • Interest Rate: The FD interest rates applicable to Tax Saving Fixed Deposits are fixed by individual banks. Most times the range is between 5.5% and 7.5%. 
  • Single and Joint Holding: FDs with tax-saving components are allowed in either joint or single names. But in the case of joint names for tax saving, only the first holder gets the tax benefit, which neither of them opts for. 
  • No Loans or Overdrafts:  The main reason is that a deposit under Tax Saving FD has a specific period when it should remain. So, banks do not extend FD Loans or Overdrafts on such deposits. This means that the focus of your investment is retained until the maturity period. 

3 Reasons to Invest in Tax-Saving Fixed Deposits 

  1. Tax Saving: 

The most important thing when placed under a Tax Saving FD is to avoid any tax liability in the end. That’s the advantage because claiming reimbursement has a per cent of the claimed amount, and this amount is virtually completely retained by the bank. 

  1. No Market Risk: 

Tax-Saving FDs don’t expose you to market risk like ELSS which is a type of mutual fund scheme that is linked to the stock market. Your risk is low, and you have a guaranteed return instead. As the rates of interest on FD are fixed for the entire duration, it assures the investors of peace of mind as it minimizes volatility. 

  1. Encourages Long-Term Investment: 

The long-term nature of investments is enhanced by Tax-Saving FDs since these have a lock-in period of 5 years. This enables you to cultivate a level of patience while also allowing your funds to increase in a controlled manner. 

Conclusion 

In conclusion, tax-saving Fixed Deposits are an effective means of tax saving and securing one’s financial future since you can earn a certain return.

With low levels of risk, stable returns, and investment over a longer duration, these FDs are perfectly suited for investors who are looking for stability and efficiency at the same time.

By making an investment in a tax-saving FD, it is possible to enjoy the benefits of wealth generation while also saving on tax payments. Seize the opportunity and invest immediately to benefit from the future growth of your savings. 

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