Bank deposits are an extremely favoured way to save money. This is the reason most depositors make and maintain FDs. But did you know that you can reduce your income tax outgo with them? Yes, a tax saving fixed deposit earns regular interest and also saves tax. These are among the benefits of such a fixed deposit. Let us find out more about this interesting way to build wealth.
Under current tax laws, you can invest Rs 1.5 lakh a year or Rs 12500 per month, in a tax saving fixed deposit, or different tranches as long as you stick to the limit. With current interest rates being in the 6-7.5% range, a tax saving deposit with a lock-in of five years protects your money from any withdrawal. In this way, you are guaranteed of saving the deposit money irrespective of any situation.
What is more, a tax saving deposit is completely safe. Since banks are heavily regulated by the RBI, one of the biggest benefits of fixed deposit is 100 per cent safety and guarantee for both your principal and interest. Individuals and Hindu Undivided Families (HUFs) are allowed to open tax saving FDs.
Another of the important fixed deposit features is the usage of this route to not just save taxes, but earning more than the saving account. In comparison to 3-4 per cent rate in a normal saving account where most depositors park lot of money, a tax saving fixed deposit earns more than the current inflation and the savings account. With a fixed tenure and cap on annual investment, you have complete transparency about such FDs.
Because these deposits allow you to save tax, they are designed in a different way. Apart from no premature exit, tax saving bank deposit does not allow for it to be used as collateral against a loan. While post offices also allow depositors to use the 5-year deposit window, the customer services of a bank are a class apart.
The interest earned on these FDs is not tax-free. Most investment avenues are taxed at the end of maturity. In this case, too, the tax rate applicable is based on the depositor's tax bracket.
Among the various fixed deposit features, the interest on tax saving FDs is payable mostly on a quarterly basis. But taxes can be deducted at source, right from the bank branch. To avoid TDS deduction on the interest earned, try to submit Form 15G (or Form 15H for senior citizens) to the bank.
Also, never forget to put a younger nominee in place for the tax saving deposit. In an unfortunate situation, the main deposit-holder dies, the nominee will get to be the trustee of the FD. If you are a senior citizen, you must bargain for a better interest rate. This is because banks have a differential interest rate offering for 5-year tax saving fixed deposit.
A reasonable interest rate, five-year lock-in, Rs 1.5 lakh investment ceiling annually, RBI safety, and saving taxes have given this bank product a load of fixed deposit features making it a highly viable investment option.