All You Need To Know About Tax Saver Bank Fixed Deposits in India

December 17, 2021 Mutual Fund

The Government levies several taxes to the citizens of the country. This collected tax revenue is utilised to improve the standard of living of the citizens and boost the economy by undertaking new projects. You are liable to pay the taxes if your annual income is in the taxable slab i.e. if it exceeds a certain amount. However, the government offers deduction under special tax exemption sections that can help you to save your income tax to a certain extent.

Section 80C of the Income Tax Act, 1961 is one of the most popular tax exemption sections where you can declare your investments and payments; and get maximum tax deductions. You can claim up to Rs 1.50 Lakhs under Section 80C of the Income Tax Act every financial year, based on the payments and investments you make.

Here are some of the common Investments or Payments eligible under Section 80C are:

• Life Insurance Policies (Term Plans)

• Unit Linked Insurance Plans (ULIPs)

• Equity Linked Saving Schemes (ELSS)

• Tax Saver Fixed Deposits

• Public Provident Funds (PPFs)

• Employee Provident Funds (EPFs)

• Principal amount payment towards Home Loan

• Tuition Fees of up to two children

• Stamp duty and registration charges for the purchase of a new property

• Sukanya Samriddhi Yojana (SSY)

• National Saving Certificate (NSC)

• Senior Citizen Savings Scheme (SCSS)

• Infrastructure Bonds

In this article, we will focus on Tax Saver Fixed Deposits and everything you should know about it to save on your income tax.

What is Tax Saver Fixed Deposit?

A Tax Saver Fixed Deposit or Tax Saving Fixed Deposit is one of the preferred financial instruments that offers tax exemptions under Section 80C of the Income Tax Act, 1961. So, the investors can claim a deduction of up to Rs 1,50,000 per annum through a Tax Saver Fixed Deposit.

What is the eligibility criteria for a Tax Saver Fixed Deposit?

The Tax Saver Fixed Deposits can be opened with any public or private bank or post office. This facility is available only for:

• Resident Individuals; or

• Hindu Undivided Families (HUFs)

What are the features of the Tax Saver Fixed Deposits?

Tax Saver Fixed Deposits have a number features and benefits, a few of which are listed below:

• The rate of interest offered on Tax Saver Fixed Deposits is the same as regular Fixed Deposits of the same maturity period, but higher than the Savings Bank Accounts.

• The Tax Saver Fixed Deposits have a minimum lock-in period of five years. However, to get the tax benefit, you can extend the term at the time of maturity.

• The interest earned on the Tax Saver Fixed Deposits is taxable as per your income bracket.

• Investment in Tax Saver Fixed Deposit can help you claim tax deduction of up to Rs 1,50,000 in a financial year, under Section 80C of the Income Tax Act.

• The minimum investment amount for a Tax Saver Fixed Deposit differs from bank to bank.

• You can opt for flexible interest payouts.

• The rate of interest is fixed and remains unchanged for your entire tenure of five years, irrespective of any interest rate fluctuations.

What are the things to remember when investing in a Tax Saver Fixed Deposit?

• Eligibility:

  As discussed, the Tax Saver Fixed deposits are available only for Resident Individuals and Hindu Undivided Families (HUFs). Moreover, a minor can invest in a Tax Saver FD jointly with an adult. However, other institutions, such as partnership firms, corporates, trusts, etc., cannot take the advantage of the scheme.

• Lock-in Period:

  The Tax Saver FDs have a lock-in period of 5 years. So, unlike regular fixed deposits, premature withdrawal, Loan Against Fixed Deposit, overdraft facility, etc. is not permitted with the Tax Saver Fixed Deposits. Besides, there is no auto-renewal facility offered on these deposits. However, you can renew the FD for another 5 years, at the time of maturity.

• Rate of Interest:

  Like any other type of fixed deposit, the Tax Saver FD also offers guaranteed returns. The interest rate offered on a Tax Saver Fixed Deposit is generally the same as the interest rate offered on a regular fixed deposit of the same tenure. Also, the senior citizens are usually offered a 0.5% extra rate of interest than what is offered to the non-senior citizens (residents below the age of 60 years). For example, if the interest rate for a Tax Saver Fixed Deposit offered to non-senior citizens is 5.5% p.a., it will be 6% p.a. for the senior citizens. Furthermore, you should keep in mind that the interest rates may vary from bank to bank. Also, the interest rates can differ for resident individuals and HUFs.

• Tax Deduction:

  As already discussed, you can claim a tax deduction of up to Rs 1,50,000 in a financial year against the Tax Saver FD, under Section 80C of the Income Tax Act, 1961. However, the interest earned on the Fixed Deposit is taxable as per your tax bracket. Furthermore, under Section 80TTB of the Income Tax Act, the senior citizens (Residents who are of the age of sixty years or more at any time during the relevant previous year) can get the tax exemption on interest income of up to Rs 50,000.

• Tax on the Interest Earned:

  The bank deducts TDS (Tax Deducted at Source) when the interest earned by residents on Fixed Deposits or/and Recurring Deposits is more than Rs 40,000 in a financial year and the interest earned by senior citizens on FDs or/and RDs is more than Rs 50,000 in a financial year.

  However, the bank cannot deduct the TDS if you submit the form 15G (for residents below the age of 60 years) or 15H (for senior citizens).

• Premature Withdrawal:

  It is not advisable to invest in a Tax Saver FD if you might require the funds in the near future as these FDs do not allow partial or complete premature withdrawals. Besides, unlike regular fixed deposits, availing of loans or overdraft facilities against the Tax Saver FD is also not permitted.

• Account Holding Mode:

  The Tax Saver FD can be booked in a single or joint mode. However, in case of a joint deposit, only the first account holder is eligible for tax benefits.

• Interest Payouts:

  You can choose from the flexible interest payout options and receive the interest in your registered bank account on a monthly or quarterly basis or reinvest it in the principal amount.

• Transfer:

  If you have changed your location, you can transfer your Tax Saver FD to your nearest bank branch or post office to ensure smooth customer service.

Should you invest in a Tax Saver Fixed Deposit?

Before investing in any financial instrument, it is crucial to consider your age, life stage, current and future estimated income, financial goals, risk appetite, and investment horizon. The Tax Saver FD might be ideal for you if;

• You have zero to low-risk appetite

• You are nearing the retirement

• You are looking for a safer investment option to save tax under Section 80C

How to invest in a Tax Saver Fixed Deposit?

Booking a Tax Saver FD is as simple as booking a regular FD. If you are an existing customer of the bank, you can book it online through internet banking or mobile app, from the comfort of your home. Or, you can visit the nearest branch of your preferred bank or post office and submit the duly filled and signed Tax Saver Fixed Deposit form along with self-attested copies of necessary documents.

If you hold an active savings bank account or other fixed deposits with the bank, you might not be asked to submit any additional documents. Whereas, if you are a new-to-bank customer who does not have any banking relationship with the particular bank or your existing account is in a frozen or inactive state, you will be required to submit the identity proof, address proof, photograph, etc. as requested by the bank/ post office representative.

To Conclude:

The Tax Saver Fixed Deposit is the right investment option for you if you are looking for an investment avenue that comes with low risk and offers guaranteed returns for a long time. It is also ideal for those who want to save income tax of up to Rs 1.5 Lakhs in a financial year, under Section 80C of the Income Tax Act, 1961. You may also compare the above discussed other investment and payment options that are eligible under Section 80C and choose the best-suited option. Moreover, before making an investment, it is advisable to compare the interest rates offered by different financial institutions, which will help you to generate maximum returns on your tax saving investment.

This article first appeared on PersonalFN here