A Tax saving Fixed Deposit or commonly known as 5 year Tax saving FD is a kind of fixed deposit that helps you to save your income tax to some extent.By investing your money in a Tax saving FD,you get a Tax deduction Under Section 80C upto a maximum of Rs.1.5 lakhs.This tax deduction is for the amount invested in Tax Saver Fixed deposit.
You can open a Tax saver FD with a minimum amount of Rs.100 upto a maximum of Rs.1.5 lakhs. However,the minimum amount required for opening a tax saver FD may vary in different banks.
Tax Saver FDs have a lock in period of 5 years and premature withdrawal is not allowed.
Hence,tax saving FD is one of the various tax saving investments that qualify for tax deduction under section 80C.
It provides you dual benefits of :Earning a fixed rate of interest and Tax benefits.
Who can deposit under the scheme?
An individual or a Hindu Undivided Family (HUF) having Permanent Account Number (PAN) can make deposit under the scheme.
What are the type of Deposits?
The deposit can be either in the form of Fixed Deposit or Cumulative Deposit
(a) Single holder type deposit -
The single holder type deposit receipt shall be issued to an individual for himself or in the capacity of the Karta of the Hindu Undivided Family (HUF).
(b) Joint holder type deposit –
The joint holder type deposit receipt may be issued jointly to two adults or jointly to an adult and a minor, and payable to either of the holder or the survivor. Provided that in the case of joint holder type deposit, the deduction from income under section 80C of the Income Tax Act shall be available only to the first holder of the deposit.
What is the Interest on Tax saving Fixed deposit ?
The interest on Tax saving FDs ranges between 7% to 8.5% per annum .However,senior citizens are offered a bit higher interest rates as compared to other individuals.
Different banks offer different fixed deposit rates and interest is normally calculated on a quarterly basis.
Is the interest on Tax saving FD taxable ?
Yes,The interest on any kind of.tax saving FD or a simple Fixed Deposit is fully taxable.
The tax saving is only for the amount that has been invested in a Tax saving FD and not on interest earned.
Moreover,banks are instructed to deduct TDS @ 10% on interest on Fixed deposit,if the interest amount exceeds Rs.10000 during a financial year.Banks are authorised to deduct TDS@20% if PAN is not furnished.
Also,banks deduct tax on fixed deposits as and when interest is accrued and not when it is paid.TDS amount is shown in your Form 26AS.So,it is always wise to pay tax on yearly basis and not when the FD matures.It is quite possible that when your FD matures,you might fall in a higher tax slab and thus end up paying higher taxes on the lump sum amount.
Important Features of a Tax Saving FD are :
1 Tax Saver FD has a maturity period of 5 years.
2 It qualifies for Tax deduction under Section 80C upto maximum Rs.1.5 lakhs.
3 Individuals,HUFs and NRIs can invest in Tax saving FDs.
4 Premature withdrawal is not allowed.
5 Interest on Tax saver FD is fully taxable.
6 Loan facility is not available against tax saver FD.
7 Tax saver FD can be opened in Single name or Joint name.
Income Tax Exemptions:
The principal amount is tax exempted under section 80C of the Income Tax Act, 1961 (43 of 1961) subject to the overall ceiling of Rs. 1.50 lac, along with investment in other schemes like PF, PPF, NSC, Insurance Premium, and Infrastructure Bonds etc.
Interest on these deposits shall be liable to tax under section 194A or section 195 of the Income Tax Act. Accordingly, the interest amount is liable to TDS.
15H / 15G wherever applicable as in case of other term deposit schemes and as per Government guidelines.
Different banks offer different interest rates on their tax-saving FDs and you can visit this link to check out the rates offered. These FDs have a lock-in period of 5 years and the interest is taxable.