A fixed deposit is an investment avenue offered by banks and NBFCs (non-banking financial companies). It helps in expanding your wealth securely and safely.
If you want to invest in a fixed deposit for tax benefits, you can choose a tax saving FD. Then you can avail of tax exemption on your FD income.
This scheme is also useful if you have a low-to-zero risk appetite and/or are approaching your retirement. This kind of FD offers dual benefits of low risk and guaranteed returns.
That being said, here are 5 things to know about this fixed deposit scheme.
Who Can Invest in a Tax Saving FD and What Amount?
Only Hindu Undivided Families (HUFs) and individual persons can invest in a tax saving fixed deposit scheme in India. You can start the FD with a minimum deposit. This amount differs from one bank to another.
How can You Invest? What is the Lock-in Period?
You can invest in tax saving FDs via any private or public sector banks but not rural or cooperative banks. It is always a good idea to choose a reputed bank that offers several fixed deposit benefits.
These FD schemes come with a lock-in period of 5 years. Remember that you cannot carry out any premature withdrawals or get a loan against these deposits.
How Can One Hold this Fixed Deposit Scheme and Get Tax Benefits on It?
You can hold a tax saving FD in the ‘Joint’ or ‘Single’ mode of holding. If you opt for the joint option of holding, only the first holder can enjoy the tax benefit. As per the present laws under the Income Tax Act of India, Section 80C, your claim of tax deductions for investments in this scheme would be deducted from your gross total income. That way, your taxable income would be determined. You can avail of a nomination facility for these fixed deposits.
Taxability of the Fixed Deposit Interest Income
The interest that you earn is taxed according to your tax bracket. So, TDS applies to the interest income. You can pay the interest on your deposits on a quarterly or monthly basis or reinvest it in another FD.
You can avoid TDS on your interest earned if you submit Form 15G (or Form 15H in the case of senior citizens) to your bank. A senior citizen is allowed to enjoy fixed deposit tax benefits of up to ₹50,000 on the earned interest according to the newly inserted section 80TTB of the Income Tax Act.
Fixed Deposit Interest Rate Differential
The top banks for fixed deposits in India offer little higher interest rates on the deposits to senior citizens than that offered to non-senior account holders of the same FD. Such an interest rate differential is also available for a tax saving FD.
When you go for a tax saving FD, don’t forget to compare the available interest rates and settle for the one that fits your investment needs. Thus, you can make the most of this fixed deposit scheme.