Fixed Deposit Income Tax Exemption (Quick Update)

Tax-saving fixed deposit accounts come in many forms and allow individuals to save money. You are free to choose the term of your fixed deposit, but banks generally have a 5-year fixed deposit system for tax savings. Investing in tax-saving FDs allows you to claim tax incentives under Section 80C of the Income Tax Act. In this article, learn about tax savings on FDs, fixed deposit income tax exemption, and tax benefits and restrictions on fixed deposits.

What is Tax Saving FD?

Tax Saving FD is a type of fixed deposit that allows individuals to claim a tax credit under Section 80C of Income Tax, 1961.

These deposits are through two types of accounts, single holder deposits, and joint holder deposits. If you choose joint ownership, tax benefits are only available to the first owner. 

The term of the tax-saving fixed deposit is 5 years. Section 80C deductions are available for Hindu undivided families (HUF) and individuals.

Who are eligible for Tax Savings FD? 

The following entities are eligible to open an FD Tax Savings Account: –

• Resident of India
• Individuals
• Hindu Undivided Families (HUF)
• Minors can invest jointly with adults

What are the features of a Tax-saving Fixed Deposit?

Below is an overview of these main features:

•  The minimum term for tax-saving deposits is 5 years.

• Early withdrawals or loans against such FD schemes are not permissible.

• Tax-saving FDs are available at all private and public sector banks (except rural and cooperative banks).

• Such schemes are open to both HUFs and individuals over the age of 18. Minors are also eligible for such tax-saving FDs, provided they invest together with an adult.

• Tax Savings FD is either in Single or Joint mode. For joint mode, the taxation of FD interest benefits applies only to the original account holder.

• A tax-saving FD’s minimum deposit amount varies from bank to bank, but its maximum deposit amount is capped at 1.5 lakhs.

• Interest rates for tax-saving FDs vary between 5.5% and 7.25%. Senior citizens have a slightly higher ROI.

• Interest arising from such schemes is taxable. This tax on the interest from FDs is withheld at source (TDS) on the investor’s tax bracket.

• Such investment forms offer flexible options for interest payments.

•  Use the nomination function with the tax-saving FD plan.

What points to remember when putting money in tax saving FD?

The following are essential pointers to remember before deciding to invest in tax-saving fixed deposits.

Eligibility Criteria: Only individuals and HUFs can invest in the Tax Savings FD Scheme. Minors can jointly invest with adults.

Minimum deposit. The minimum investment amount for Tax Saver FD varies by bank. There is no upper limit. However, the maximum deduction allowed under Section 80C is Rs. 1.5 lakh.

Lock-in Period: The minimum lock-in for Tax Saving FD is 5 years.

Loan Facility: Loans against tax-saving FDs are not available.

Premature Withdrawal: Premature withdrawal before the maturity date is not allowed for tax-saving fixed deposits.

Investment Mode: To invest in a tax saving FD, you can visit any public or private bank except for rural and co-operative banks. Some banks even allow you to invest online.

Post Office Time Deposit: Investments in five-year postal fixed deposits are also tax deductible under Section 80C of the Income tax Act 1986. Time deposits are transferable from one post office to another post office. These FDs are opened in single or joint mode.  If the account is joint, tax benefits are only available to the first account holder.

TDS: TDS interest is levied on the investor’s tax bracket. Interest is paid monthly/quarterly or is reinvested. TDS is avoidable by submitting Form 15G (Form 15H for senior citizens) to your bank. 

For individuals, TD applies if the total interest earned exceeds Rs. 40000 in the fiscal year with no change in the taxation of interest income. Senior citizens can claim deductions up to Rs. 50,000 as interest on deposits under Section 80TTB.

How can I save tax on a fixed deposit?

You can easily protect your income from income tax deductions. This saves tax on FD interest income.

1. File Form 15G/15H.

If you file Form 15G stating that you have no taxable income, the bank will not deduct TDS from the interest earned. 15H is the mandatory form for seniors.

2. FD timing

Tax deductions are avoidable by planning the FD so that the interest for the financial year does not exceed INR 10,000.

3. Splitting of the FD

You can avoid taxation on FDs by opening one in your personal bank account and another in a HUF account. Both will be treated as distinct entities.

What are the documents necessary to open a tax-saving FD account?

To open a tax-saving FD account one needs to submit both identity proof and address proof

Identity proof 

• PAN Card
• Aadhar Card
• Driving license
• Passport
• Voter ID card

Address proof

• Bank account passbook
• Passport
• Aadhar card
• Electric bill
• Bank statement 
• Driving license 

What are benefits of Tax-Saving Fixed Deposits?

Benefits of Ta saving fixed deposits:

Safety: When it comes to saving, people rely on fixed deposits as the Reserve Bank of India closely monitors bank investments making them safer and less risky for investors. 

High-interest rates: Interest rates are higher than regular savings accounts, and the minimum term for tax-saving time deposits is five years.

Flexibility: Fixed deposits allow for one-time capital investments with flexible deposit amounts.

Tax incentives: Under Section 80C, an investor can deduct income tax up to Rs.1,50,000

Liquidity: Tax-saving fixed deposit accounts have a 5-year lock-in period. You can withdraw the amount at maturity.

Fixed returns: By investing in tax saving fixed deposits, you receive a guaranteed return at the end of the deposit term.

What are the limitations of Tax saving Fixed Deposits?

Limitations of Tax saving Fixed Deposits:

Lock-in period: Fixed deposit accounts have a lock-in period, and if an investor withdraws the money before the maturity date, he must pay a penalty on the interest rate, which is a loss.

Interests are taxable: Interest gains on tax-saving FDs are fully taxable. While filing an ITR for your income tax return, income earned from fixed deposits is reported under income from other sources.

Fixed interest rate: Tax Savings FDs offer fixed interest rates, while other financial instruments such as mutual funds and stocks offer interest rates of 12-20% or higher. Investing in mutual funds and stocks involves risks.

FD interest rates can’t beat inflation: Fixed deposit interest rates rarely surpass inflation in India.

Frequently Asked Questions (FAQ)

Is FD under tax exemption?

Tax Saving FD allows you to claim tax credits from your deposits. You can claim deductions up to Rs.1.5 lakh per annum under Section 80C.

Are all 5 years FD tax-free?

The lock-in period for a tax-saving FD is 5 years. 

Do we need to show FD in ITR?

 FD is shown under the head Income from Other Sources in Income Tax Return.

What happens when tax savings FD matures?

On maturity of the fixed deposit term, the funds will be credited back to the original account.

 What is the minimum amount required to open a tax savings FD account?

The minimum investment to open a tax saving FD account is Rs. 100.

Wrapping Up

The Tax Saving FD is one of the best tools for anyone looking to assure their income from tax deductions. These savings vehicles promise guaranteed income and freedom from market turmoil. So, if you want to know better how to save tax on FD interest, save money with tax saving FD now.

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