A Fixed Deposit can be an excellent investment choice when you want an instrument that offers growth and assured returns but has zero risk. However, if you want to make it better, you can open a Tax Saving FD. This FD lets you decrease your taxable income by up to Rs. 1.5 lakh annually when you invest.
This tax exemption can be obtained under Section 80C from the Tax Act of 1961. This kind of Fixed Deposit also enables you to increase your funds at stable FD rates of interest separate from market volatility and sentiment. However, before you invest in this deposit, there are various aspects to consider. Here are some of them:
Table of Contents
Tax implications
The principal amount of up to Rs. 1.5 lakh you invest whenever you open a Tax Saving FD is qualified for tax break. However, the eye you get in your FD is taxed per your Tax slab. Remember this when determining the total tax impact.
Risks and returns
A Tax Saving FD may not offer high returns. However, they ensure tax savings and offer assured returns on your investment.
Interest rates offered
When opening an FD, determine the interest rate offered by different banks on their Tax Saving FDs. Opting for the highest FD interest rates can boost the earning potential of your FD significantly.
Bank reputation
When selecting a financial institution to spread out an FD, make sure it is reliable and it has a good status. You might look into the security ratings of various Tax Savings FDs obtained through a few banks.
Liquidity needs
When opening a Tax Saving FD using your Banking app, you need to know that these FDs have a lock-in period of five years. Hence, you cannot usually withdraw the funds invested in this FD prematurely. Therefore, ensure sufficient liquidity for your short-term financial needs before investing your hard-earned money in a Tax Saving FD.
Benefits for senior citizens
Some banks offer a greater rate of interest on Tax-Saving FDs if you’re a senior. Hence, look into the interest levels on Fixed Deposits.
Financial goals
Before opening a Tax Saving FD, determine your financial goals and investment horizon. People may have different financial plans or objectives. For instance, they might want to open the fund to cover their child’s wedding or greater education. Since such FDs possess a lock-in duration of 5 years, they have to make sure that such occasions don’t occur in this particular period.
Mode of Investment
You can invest a tax-saving FD lump sum upfront or through periodic SIP mode. The latter suits salaried individuals with a monthly surplus. Some banks also allow part withdrawals.
Joint Holding Facility
Tax saving FDs allow joint holding with your spouse or children. This provides flexibility to withdraw prematurely during emergencies by alternate holders.
Online Investment Process
Opening these FDs is very simple through net banking or mobile apps. The entire application and KYC process is digital, quick, and paperless. Funds get auto-debited from the linked account.
Senior Citizen Benefits
Banks offer 0.25% to 0.75% higher interest to senior citizens on tax-saving FDs. Opt for banks with the best rates to earn more.
Recurring Deposits Alternative
An alternative to lumpsum tax-saving FDs is recurring deposits, allowing periodic investments. Choose a suitable option that fits your financial situation.
Premature Withdrawal Rules
While tax benefits are forfeited, premature withdrawals are allowed in case of emergencies with certain penalties. It depends on the tenure completed and the bank’s policy.
Online Account Management
Once opened, you can manage your tax-saving FD seamlessly through net/mobile banking. Features like renewal reminders, interest payouts, nominations, statements, etc., are possible digitally.
Protection Against Defaults
Bank FDs up to ₹5 lakhs are insured by DICGC in case of failure. However, always opt for public/private banks with the highest safety ratings.
Who Should Invest in Tax Saving FDs?
Here are some profiles who can benefit most from tax saving fixed deposits:
- Salaried Individuals: Great for salaried investors who get tax benefits plus fixed earnings on surplus funds.
- Retirees: Ideal for retirees seeking safe returns through passive income to complement pensions.
- Students: Parents can invest for their children and fund higher education later using maturity proceeds.
- New Investors: Beginners get guaranteed returns without capital erosion, making it an ideal first-time investment.
- High Tax-bracket Investors: For investors in higher tax slabs, they offer a twin benefit of tax savings and FD earnings.
Investment Process
Investing in tax saving FDs is very quick and convenient digitally:
- Open a savings account with the bank if needed
- Fill online application form with investor and investment details
- Upload KYC documents for e-verification
- Funds get auto-debited, no cheque or paperwork is needed
- The investment confirmation receipt is sent instantly
Thus, tax-saving fixed deposits make an excellent addition to one’s investment portfolio, giving twin benefits of wealth creation and tax optimization.
Conclusion
A Tax Saving FD can be suitable for individuals wanting to grow their hard-earned money at a stable interest rate while enjoying a tax deduction. Now that you know the key considerations, be mindful of them when planning to open such an FD.
