Tax-saving Fixed Deposits, or FDs, are a Fixed Deposit scheme that helps individuals save on taxes. Under the tax-saving FD, you can save taxable income up to ₹1.5 lakh under Section 80C of the Income Tax Act.
However, one mandatory condition for a tax-saving FD is a 5-year lock-in period. If the Fixed Deposit is prematurely withdrawn, then the deductions would be considered as income during the year.
How do tax-saving FD work?
The working of the tax-saving FD is simple. Let us understand by taking an example.
Mohit is planning to invest a lump sum amount in an FD. He compares different banks and financial institutions based on interest rates and tenure. The FD interest rate is 7.5% and he decides to put ₹1,50,000 in a tax-saving FD with a 5-year tenure.
By doing this, he is eligible for a tax deduction of up to ₹1.5 lakh under Section 80C. Furthermore, the FD interest rate will remain fixed throughout the 5 years. However, he cannot withdraw or break this FD before maturity.
Benefits of having tax-saving Fixed Deposits
A tax-saving Fixed Deposit helps you earn guaranteed returns and offers several financial advantages. Here are the key benefits:
Guaranteed returns
One advantage of tax-saving FDs is guaranteed returns. Unlike other market-linked tax-saving investments, tax-saving FDs offer fixed and assured returns. Your money grows steadily with no risk of loss from market fluctuations.
Suitable for all individuals
Whether you are a salaried individual, retiree, or self-employed, tax-saving FDs are a suitable option. The plan offers a stable option for building wealth with the added benefit of tax savings.
Safe and secure investment
Tax-saving FDs are among the safest investment options, especially when opened with reputable banks. The principal amount and interest are both protected, ensuring a fixed return for the individuals.
Long-term discipline
Another crucial advantage is that it allows long-term discipline for the investors. A 5-year lock-in period encourages you to stay invested and let your money grow. This further helps in building a habit of long-term saving while enjoying steady returns.
Easy to invest
The tax-saving FDs are less complicated compared to other forms of instruments. Individuals can start their FD either by opening it online via a bank portal or by visiting the branch. Also, many banks offer better interest rates on FD, so comparing interest rates across banks is crucial before investing.
Who should invest in a tax-saving FD?
Anyone can invest in a tax-saving FD; however, some individuals should definitely consider these FDs.
- Individuals nearing retirement with a low risk appetite should consider investing in tax-saving FDs.
- If you are in a higher tax bracket and want to reduce your tax liability, a tax-saving FD is a suitable option.
- Tax-saving FDs can also be opened for minors, making it a good option for parents who want to plan for their kids’ long-term finances.
Conclusion
Investing in a tax-saving FD is a good way to balance safety, returns, and tax benefits. It helps you grow your money securely while reducing your tax liability under Section 80C. This type of FD plan comes with a 5-year lock-in period, which ensures assured returns and zero market risk, making it a reliable choice for conservative investors.
