Did you know that one of the safest ways to invest and save money on taxes is with tax-saving fixed deposits? Yes, they offer huge tax savings. Investors can receive a tax deduction of nearly Rs 1.5 lakh by investing in various tax-saving fixed deposit (FD) plans. Your overall taxable income is reduced by the amount of FD investments you make in a given financial year. As a result, investing in saving tax on fixed deposit accounts offers you benefits beyond tax savings, such as interest on the amount you deposit.
How Do Tax-Saving FDs Work?
Investors can reduce their tax liability by using tax-saving fixed deposits. These deposits also assist investors in having a reserve sum to draw interest from and use right away in the event of a marriage, divorce, child’s further education, retirement, or other important events.
Technically, a fixed deposit (FD) investment that qualifies as a deduction as per Section 80C of the Income Tax Act of 1961 is referred to as a tax-saving FD. This allows every taxpayer to deduct up to Rs. 1.5 lakh annually by investing in fixed deposits that save on taxes. However, earning from a fixed deposit interest rate is subject to taxation.
Who Is Eligible to Invest in Tax-Saving Fixed Deposits?
Any Individual and Hindu Undivided Family (HUF) can invest in tax-saving fixed deposits and receive a tax deduction of up to 1.5 lakhs in a fiscal year (FY) on their invested amount. You can apply for an FD account at any bank or use your current savings account to start a saving tax on a fixed deposit account. If you apply to another bank, you should be able to open an FD account without a savings account.
The advantages of tax-saving fixed deposits
In addition to being a tax-saving choice, the tax-saving fixed deposit is a terrific financial tool to ensure significant savings at a competitive interest rate. It’s regarded as the safest and lowest-risk investment because it’s a bank-based investment that the RBI closely monitors. Upon maturity, the fixed deposit money is easily redeemed with interest. Additional advantages of FDs include:
- The interest rate on FDs is higher than that of traditional savings accounts.
- The investor can choose the FD amount as per their financial goal.
- Any public or private sector bank, excluding cooperative and rural banks, is a place where investors can make investments in these FDs.
- Fixed deposits held at the post office are transferable between post offices.
- At the time of investment or later, the depositor can appoint a nominee.
- Loans secured by tax-saving FDs are available at a cheaper interest rate.
Most Commonly Asked Questions on Tax-Saving FDs
1. What paperwork is needed to open fixed deposits?
A passport-size photo, evidence of identity (PAN), and proof of address (passport, driver’s licence, etc.) are needed to open a new savings account and complete KYC verification for tax-saving fixed deposits.
2. What maximum/minimum investment amount can be made in tax-saving FDs?
While there is no cap on the maximum deposit, banks may have different minimum investment requirements for fixed deposits. A person may only deduct up to Rs. 150000 under Section 80C.
3. Who is eligible to be the FD nominee?
Only one person may be designated as the nominee for fixed deposits that save you money on taxes. They might be your child, spouse, or parent. If a nominee is not named at the time of investment, one may be named afterwards.
4. What is the FD duration for tax savings?
The tenure for investing in FDs ranges from 7 days to 10 years. Most fixed deposits that save on taxes have a tenure of five years. Premature withdrawal is not permitted in this context. These deposits are locked in for five years.
5. What is the holding process in FDs?
Fixed deposits may be held individually or jointly. The first holder receives the income tax deduction in a joint holding situation.
6. Is the amount of interest on FDs tax-free?
Tax deductions are available on FD investments up to Rs 1.5 lakh under section 80C. TDS is subtracted from the interest portion of fixed deposit payments since the fixed deposit interest rate is taxed according to the investor’s tax bracket.
Be aware that premature withdrawal may not be permitted with tax-saving fixed deposits. Depositors who withdraw their money too soon may incur penalties.