What are the benefits of investing in tax-saving fixed deposits_

Are you planning to park your excess funds in a secure place and earn healthy returns? Well, you can think of opting for fixed deposits or FD. Now, what are FDs? In simple words, fixed deposits are an ideal investment avenue. Considering the long term, the FDs have the potential to generate greater returns through compounding benefits. In addition, the FDs are seamless to set up or manage. But if you want to learn about tax-saving fixed deposits, here’s what you should learn further.

An Introduction to Tax Saving Fixed Deposit

The tax-saving fixed deposit is a form of fixed deposit where individuals claim the tax deduction under section 80C of the income tax 1961. The deposits may get made via two basic account types. While the first one is the joint holder type deposit, the other type is the second holder type deposit.

And if you choose the joint mode of holding, the benefit is only available to that first holder. The overall maturity period of tax-saving FD is around five years. Deductions under 80C are available to individuals. Here’s exploring the five key advantages of investing in tax-saving FDs.

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Minimum deposit needs

First things first, the tax-saving fixed deposits don’t need you to accumulate a considerable amount for the fixed deposit. You will be able to open the tax-saving fixed deposit with a minimum amount of Rs. 10,000. Nonetheless, the overall investment one can make in the tax-saving FD is around 1.5 lakh for each fiscal year.

Assured returns

The other tax-saving instruments like mutual funds might be risky because they get affected by the market fluctuations. However, with the tax-saving fixed deposits, you will be able to earn guaranteed returns. As soon as you lock the FD at an interest rate, the fixed deposits can offer the returns at similar rates even after your bank revises the rates.

Small lock-in period

Before you opt for the fixed deposit investment plan, know that the deposits have a lock-in period of around five years. So, that means that you can’t withdraw money before five years from the very first date of booking. The lock-in period is shorter than that of the tax-saving instruments like PPF accounts which have a lock-in period of around 15 years.

The tax benefits under 80C

Under the Income Tax Act section 80C, the HUFs and Indian residents may claim the tax deductions of around 1.5 lakh invested in the tax-saving fixed deposit.

Thus, when you aim to file the ITR, you will be able to deduct the amount invested in the tax-saving fixed deposit from the taxable income as long as it’s equal to or less than 1.5 lakh. You might claim the deduction only for a fiscal year during the time when you create the fixed deposit. 

In general, the tax amount that you save will entirely depend on the tax bracket. Thus, when you are in a high tax bracket & deposit is around 1.5 lakh in the tax-saving fixed deposits, you will be able to save up to more than 40 thousand in the tax. In addition to this, you can pay the taxes on the interest income, and the bank can deduct the TDS in accordance with it.

Nomination Facilities and Joint Holding

You will be able to open the tax-saving FD jointly. Nonetheless, the first holder will only be able to claim tax benefits. The tax-saving fixed deposits let you have an option to nominate the individual to take over account proceeds on your behalf. A nomination facility is also available for both jointly held and solely held accounts.

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Is Tax Saving Fixed Deposits Similar to PPF?

Both tax-saving FD and PPF are regular income-earning investments where the pre-determined assured return is offered to the investor. In addition to this, the investor may even claim a deduction of the maximum of 1.5 lakh for investing in the investments. But there are certain differences between PPF and tax-saving FD. While the maturity for the FD is five years, it takes 15 years for the PPF to mature.

However, around 1.5 lakh of the deduction is available from both the tax-saving FD and PPF. For the PPF, the interest rate is fixed by the government. On the other hand, the interest rate of the tax-saving FD gets fixed by the bank. The tax on the interest earned for FD is as per the income tax slab rate. But for PPF, it’s exempt. The loan facility for the FD is not allowed. But in PPF, it can only be availed after crossing the mark of three years.

Wrapping up

The tax-saving fixed deposits have become a boon for risk-averse investors. They comprise a low deposit need and have less risk than other tax-saving choices. In addition, they also have a shorter lock-in time frame when compared to the PPF accounts. Besides this, they may also offer the benefits of the regular FD, like assured returns and simplicity. So, as you can see, the process might be simple. But you need to take the final step towards saving taxes & open the fixed deposit accordingly.