You can invest using a tax-saving FD according to section 80C of the Income Tax Act for a minimum tenure of five years. This allows the tax exemption of Rs. 1.5 lakhs, along with guaranteed returns. Senior citizens can benefit from greater interest rates with their tax-saving FD if the banking institution offers particular programmes for them. Understand more about tax-saving fixed deposits in this article!
Features of a tax-saving fixed deposit
The following are the features of tax savings deposits:
- A tax-saving fixed deposit has a tenure between five to ten years.
- The available tax-saving FD interest ratesfor the general public are between 5.30% per annum to 6.30% per annum. However, the FD tax saver interest rates vary depending on different banks.
- The deposit range for tax savings deposits is between Rs. 100 to Rs. 1,50,000 per annum. However, the deposit range would depend on which bank you are approaching.
Benefits of tax-saving fixed deposit
The following are the benefits of a tax-saving fixed deposit:
- Exemption from paying taxes as specified in Section 80C of the Income Tax Act of 1961.
- After the 5-year lock-in term has expired, premature withdrawal is permitted.
- Most banks increase interest rates for senior citizens by 0.50%.
- The majority of Tax Saving FD plans offer the option of a combined account.
Note that just the primary account owner gets qualified for tax benefits in the case of a jointly owned account.
Top Tax Saving Fixed Deposit Schemes in India (Banks and Small Finance Banks)
Here is a list of Tax saver FDs offered by various banks with less than Rs.2 crore investment in Fixed Deposits. The following rates are effective as of February 2023 and apply to deposits under Rs. 2 crore with terms ranging from 5 years to 10 years.
Documents required for tax-saving fixed deposits
Here are the documents that would be required for a tax-free FD:
- PAN card
- An identity proof recognised by the government
- Aadhaar card
- Passport, driving license, or Voter ID card
- Ration card
- Age-proof (for senior citizens)
- Address proof
- 2 recently clicked passport-sized photographs
Tax-deductible on fixed deposits
According to existing tax laws, an individual may deduct up to Rs. 1.5 lakh of their investment in tax-saving fixed deposits from their income. The amount would be subtracted from their overall gross income to determine the individual's taxable income. The Income Tax Act's Section 80C authorizes this deduction. The following requirements must be met to claim this deduction:
- Only those who are members of Hindu United Families (or HUF) and individuals are permitted to invest in fixed deposit plans that offer tax benefits.
- The minimum amount that the bank specifies for the Fixed Deposit is permissible.
- The 5-year lock-in term applies to the tax-saving fixed deposits. Loans and premature withdrawals from the fixed deposit are prohibited.
- People may invest in such Fixed Deposits through any commercial or public sector bank. Cooperative and rural banks cannot enjoy these benefits.
- Section 80C of the Income Tax Act of 1961 permits deductions for Post Office Time Deposits with terms of five years.
- Transfers between post offices are permitted for Post Office Fixed Deposits.
- Fixed Deposits may be held sporadically or collectively. The initial holder of the joint fixed deposit will receive the tax benefit in this scenario.
- Tax Deductible at Source (TDS) would be applicable since the interest earned on such Fixed Deposits is taxable according to the investor's tax bracket. The investment will pay interest monthly or quarterly, and this interest could be reinvested.
- There is a nomination provision for Tax Deductible Fixed Deposits.
- On these Fixed Deposits, banks give senior citizens comparatively greater interest rates. For Fixed Deposits with Tax Savings, there is a higher interest rate.
How to avoid TDS on fixed deposits?
All interest income produced in India, including interest from FDs, is subject to Tax Deducted at Source (or TDS). If the account holder or FD applicant’s interest income for any financial year exceeds Rs. 10,000, they are legally required to pay tax. However, the account holder would not be required to pay tax if the earned interest is lower than Rs. 10,000. The following are some of the factors that one needs to be aware of to avoid TDS on fixed deposits:
- Self-declaration: Please file form 15G or 15H, as appropriate, if the combined amount of taxable income produced in the financial year and the interest gained from FDs does not exceed the allowed taxable limit.
- Which form to fill out: Form 15H would be for senior citizens, whereas Form 15G is intended for the general public. The applicant must be an Indian citizen aged 60 years or younger whose income does not exceed the applicable tax threshold. Only Indian residents over the age of 60 and those whose income is below the specified tax threshold may complete Form 15H.
- Managing your investments better: Investing can be done so long as it doesn't cost more than Rs. 10,000 each year. For instance, the financial year could be split in half by investing in a one-year fixed-rate bond in October. You can avoid paying TDS upon your investment because the fiscal year ends on March 31.
- Waiving off of TDS for the second applicant: Upon the primary account holder's death, the second account holder (or the second applicant) can operate the joint account.TDS will be automatically withheld from your account when you are the former applicant for a joint FD and your interest income is in excess of the permitted amount. TDS is not likely to be taken out of a joint account if you are the subsequent applicant.
- Distribution of investments: Instead of placing all of their money in one bank, investors can spread their investments over several banks.
- PAN: For your FD investment, the bank must receive your PAN information. Banks typically charge TDS at a greater rate of 20% if you don't provide your PAN information.
- Late submissions: The Income Tax authorities would issue a refund if the account holder files tax returns even though you failed to submit the necessary self-declaration forms and the TDS was deducted. However, you will be required to wait until July of the following year, and it will take a few more months for the reimbursement to be finalised.
Due to their assured returns and lack of financial risk, FDs continue to rank among the most popular investment options. Instead of paying high taxes, taking all required measures to undertake tax planning and managing your money more effectively is crucial. In addition to the techniques previously described, if one makes further investments, one may be able to claim tax exemption, which will assist lessen the tax overburden on the person to some extent.
Invest in a tax-saving fixed deposit and save on taxes while getting a return on your money!
How much money is required to create a Tax Saving FD account?
For this scheme, most banks demand a minimum deposit of Rs. 100. Check our list for more details on each bank.
Is early withdrawal permitted from tax-saving FDs?
Banks do not permit early withdrawals from tax-saving FDs.
What kind of tax deductions are available through tax-saving FDs?
With tax-saving FDs, an investor may claim a maximum of Rs. 1.5 lakh annually.
Who ought to invest in an FD with tax benefits?
Anyone who wants to reduce their tax obligations can invest in tax-saving FDs.
Do tax-saving FDs include any risk?
No, tax-saving FDs often don't pose any hazards.
Can we break 5 year tax saver Fixed Deposit?
No, most of the banks don't allow breaking up the tax saver fixed deposit before the maturity period.
Can I show FD as tax saver every year?
If the FD that you have opted for is a tax saver Fixed deposit with an investment under Rs. 1,50,000 with a lock-in period of 5 years in that particular financial year, then you can apply for investments under section 80C of the Income Tax Act.
Is 10 year FD tax free?
Not necessarily. If the investment that you opted for was a tax saver Fixed Deposit, then you can claim tax deduction in that financial year. Check with your bank for appropriate details regarding this. The returns from this investment is not tax-free.
Is there any tax-free FD in India?
There are tax saver fixed deposits in India which helps you claim tax deductions under section 80C of the Income Tax Act. The returns from tax saver fixed deposit investments is not tax-free.
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