In India, fixed deposit is one of the most popular tools to invest money. To make a fixed deposit, one has to put his money in a bank account with an agreed rate of interest for a fixed tenure. After completing the tenure, the depositor gets the total invested amount along with the interest, which is calculated on the basis of compounding.
An FD is the safest way to invest money. The return of other market-led investments fluctuates with time or market position. But return on FD is always fixed. Even if the interest rate falls after opening the FD account, it does not affect the return. The depositor gets the same interest rate which was fixed at the beginning. Unlike equity, FD is considered as the safest way to deposit money for a long term basis.
However, very few people know that in addition to being used as an investment tool, an FD can also be used to gain tax benefits. According to current income tax law, one can claim a deduction for investment up to Rs. 1.5 lakh under section 80C in a financial year if he makes the investment in a Tax-saving fixed deposit.
If you are interested in using FD for investments as well as saving on tax, here are a few points that you should keep in mind.
Tax benefits with fixed deposits: things to know
- Eligibility
Residents and individuals belonging to the Hindu Undivided Families can invest in FD and enjoy the tax-saving benefit.
- Tenure
The tenure offered by tax-saving fixed deposits is often referred to as lock-in-period. Within this period, the depositor can not withdraw or take any loan from that FD account.
- Where to invest?
Except for co-operative banks and rural banks, a depositor can invest for his FD in private and public sector banks and in Post Office as well. In the case of Post Office, the invested amount can be transferred from one Post Office to another. After completion of the lock-in-period, a person who deposits in Post Office gets a deduction on tax, under section 80 C of the Income Tax Act, 1961.
- Mode of investment holder:
One can invest in two ways for FD account. Either they can choose the single-mode or the joint-mode. In the case of joint mode, only the first holder gets the tax-saving benefit.
- TDS
As per the investor’s tax bracket, the interest earned from FD is taxable. Therefore, TDS is applicable to investors. This interest is payable on both a quarterly and monthly basis or, it can be reinvested. An investor can avoid TDS deduction on his earned interest by submitting the Form 15G. Senior citizens can get the same benefit by submitting Form 15H and they can also claim a TDS deduction of Rs.50,000 on their earned interest as per section 80TTB.
- Nomination facility available:
A fixed deposit offers the nomination facility to the depositors. In case of the death of the investor, the nominee can get the return of the FD with offered rate of interest. So, this a way to secure the financial future of an investor and his family.
- Interest rates
The interest rate on FD depends on various interest rates prevailing in the market. The bank interest rates also play a major role in deciding the interest rates on the tax-saving fixed deposit scheme. Usually, most of the banks offer a higher rate of interest to the senior citizen person than a non-senior citizen person.
Investor deposits a lump sum amount and after maturity, they enjoy the returns. This is the safest and risk-free way to deposit money and get a good return. As the FD helps on the deduction of TDS, the investor can enjoy the double benefit. The tax-saving fixed deposits can be termed safe and secure and ensure that the investor meets his financial aim by investing in FD.
Read More: How are fixed deposits taxed? Here’s everything you need to know!
