Tax Saving Fixed Deposits

When we talk about financial planning, it is crucial to look for options that offer the right balance of financial stability as well as the advantage of a guaranteed return over the short or long term. However, before choosing an investment, it’s vital to consider factors like your liquidity needs, risk tolerance, financial objectives, and investment horizon.

A safe investment option is what is usually preferred by people. Keeping their hard-earned money in a fixed deposit is considered to be the safest and surest investment instrument. FDs are provided by banks, post offices, and other NBFCs. Interest rates on Fixed Deposits are typically higher than those on savings accounts.

Fixed Deposits are investments that allow people to park a sizable portion of their extra savings and experience significant wealth growth. These instruments are not market-linked. As a result, they do not carry the same risks as mutual funds or stocks.

However, interest earned on the amount in fixed deposits is fully taxable under ”Income from Other Sources” in an ITR.

Considering this time period, it is best to plan your taxes! There is something called “Tax Saving Fixed Deposit.

What is a tax-saving fixed deposit?

A tax-saving fixed deposit is a type of fixed deposit that allows a tax deduction u/s 80C to both individuals and HUF of up to a maximum of 1.5 lakhs in a particular financial year. This scheme has a lock-in period of 5 years.

Key considerations:

  • Premature withdrawal is not allowed
  • Interest earned is subject to TDS
  • Deposits can be made through two types of accounts- Single holder Type Deposits and Joint holder Type Deposits
  • If the joint mode of holding is opted for, then the tax benefit is only available to the first holder
  • Under a tax saving FD you have the flexibility to receive interest pay-outs at your convenience. You can opt for monthly or quarterly pay-outs or choose to reinvest in the principal amount
  • There is no auto-renewal facility for a Tax Saving Fixed Deposit

How does a tax saving deposit work?

A taxpayer deposits a lump sum amount of money over a fixed period of time (5 years). Since it has a lock-in period, the amount cannot be withdrawn before maturity. Interest earned is taxable. At the time of maturity, the maturity amount is credited to the savings account linked with the FD.


Eligibility for Tax Saving FD

The following entities are eligible to open a tax savings FD account

  • Residents (Individuals & HUF)
  • A minor can invest jointly with an adult
  • Can be opened in single & joint accounts