What are Tax Saving Fixed Deposits

 

We all have our own way of saving, but while we save, there is one factor that we neglect – the taxes. You probably ignore this factor because you know saving or investing, at the end of the day, the money comes to you. But did you know how much of your saving is being chipped as taxes? But what if there was a way to save up on those taxes. Fixed deposits are a traditional way we have been investing in for years, and through fixed deposits, you can cut down on taxes. Let’s find out how.

What are Fixed Deposits?

A fixed deposit is a type of savings product in which you deposit a sum of money for a set length of time and earn interest on it. When a fixed deposit matures, the depositor receives the interest as well as the principal amount invested. Predictable-interest deposits (FDs) are a relatively safe investment option with fixed rates and scheduled bank deposits, including FDs up to Rs. 5 lakh, are insured by the Deposit Insurance Guarantee Corporation of India (DIGCI).

Let us just say you have invested Rs. 2,00,000 for a year in a fixed deposit in the Central Bank of India, and the Central Bank of India Interest Rate is 6.9%. Your total returns would amount to Rs.2,14,161, which means you have earned returns of Rs.14,161. Since your FD returns exceed Rs. 10,000 in a financial year, it will be subject to 10% tax, according to the latest tax slab. It is not small, after all, is it? So, here let us find out how to reduce taxes on FD earnings or in simpler terms, utilize a tax-saving fixed deposit.

What is a Tax Saving FD?

A tax-saving FD entitles you to income tax exemption under Section 80C of the Income Tax Act of 1961. Fixed Deposit income tax exemption is available for investments of up to Rs 1.5 lakh.

Features:

  • The contract has a five-year lock-in duration.
  • The interest earned as part of the Tax Saving Fixed Deposit is taxable and must be deducted at the time of withdrawal.
  • A Tax-Saving FD does not allow for early withdrawals, loans, or overdraft (OD) capabilities. Regular Fixed Deposits provide a borrowing opportunity in exchange for deposits.
  • Tax Saving Fixed Deposits do not have an auto-renewal feature.
  • Interest payments are variable; you can choose to receive them monthly, quarterly, or annually, or you can reinvest the interest.
  • Interest rates on Tax Saving FDs have remained constant during a five-year period.
  • Interest rates vary by bank, as do rates for Indian citizens and Hindu Undivided Family (HUF).
  • Tax Saving FDs can be held in either a single or joint account. 
  • Tax benefits are only accessible to the first account holder in the case of a combined Tax Saving Fixed Deposit.

How Can You Avoid TDS on your Fixed Deposit?

When you Self-Declare: TDS (Tax Deducted at Source) applies to all interest income produced in India, including FDs. If the application or account holder’s interest income exceeds Rs.10,000 in any fiscal year, the applicant or account holder must pay tax at any cost. However, if the interest earned is less than Rs.10,000, the account holder is exempt from paying tax.

The Right Form: Form 15G is for the general public, whereas Form 15H is for seniors. The applicant must be an Indian resident aged 60 or less, and his or her income must not exceed the stipulated tax limit. Form 15H can only be completed by an Indian resident over the age of 60 and by an individual whose income is less than the stipulated tax limit.

If you Manage your Investment Efficiently: You can make investments that do not exceed Rs.10,000 in a single year. For example, in October, one could invest in a one-year fixed-rate deposit, dividing the fiscal year in half. You can save TDS on your investment because the fiscal year closes on March 31.

PAN Card: For your FD investment, you must provide the bank with your PAN information. If you do not provide your PAN, banks would deduct TDS at a higher rate, which is normally 20%.

A Late Submission: If you fail to submit the self-declaration forms and TDS is deducted, the Income Tax agency will repay the account holder if the account holder files tax returns. However, you will have to wait until July of the following year, and the refund will take many months to process.

Are You Eligible for a Tax Saving Deposit?

The following are the eligibility categories for deposits:

  • Indian Residents
  • Individuals
  • Hindu Undivided Families

Things to Know About an FD and TDS

  • If the bank deducted TDS, but you are liable for a lesser tax rate, you can seek the amount back as a refund from the Income Tax Department in your income tax return.
  • If you fall under the higher income tax slab rates of 20% or 30%, you must pay the tax over the TDS imposed as self-assessment tax.
  • TDS is calculated by banks when the deposit’s interest is due, not when it is paid. As a result, the tax on interest income should be paid annually rather than at the maturity of the FD. Use an FD Calculator to calculate the maturity amount of your FD.

Conclusion

When it comes to tax saving, the two best instruments, I would say, are ELSS and PPF. They offer better tax-saving opportunities than an FD. But the case here is that ELSS is linked to market changes and the FD isn’t, which means your money is safe and secure. At the same time, you are reducing a small amount on the taxes.