Tax Saving Fixed Deposits : 12 Things you should know | TaxHelpdesk

Tax Saving Fixed Deposit : 12 Things you should know

Fixed Deposits (for short: FD) is a tax saving instrument offered by banks as well as Non Banking Financial Companies to its customers/depositors. These deposits usually provide a higher rate of interest than a regular savings account. The interest rate on Fixed Deposits of less than Rs. 2 crores varies from 3.00% p.a (for deposits less than one year) to 8.54% p.a. (for deposits up to ten years). This interest factor is also dependent upon the type of the financial institution.

Process of investing in Fixed Deposit

In a Fixed Deposit, the sum of money is blocked for the relevant period of the deposit. Banks allow depositors the flexibility to invest their funds from periods as low as 7 days to 10 years. On the date of maturity, the bank credits the principal amount along with the interest to the bank account of the depositor.

Also Read: Income Tax Slab Rate for Individuals under the Old & New Tax Regime

Benefits of Fixed Deposit

– Fixed Deposit amount of upto Rs. 1.5 lacs can be claimed as a deduction under Section 80C of the Income Tax Act
– More interest rates for senior citizens
– These deposits can be opened jointly with other family members
– Returns on these deposits are assured
– These deposits can be easily renewed
– There is no effect of market fluctuations on these deposits.

Also Read: Best Ways to Save Tax other than Section 80C

Who can do investment in Fixed Deposits?

Investments in Fixed Deposits can only be done by
Individuals, and
– Hindu Undivided Families (HUFs)

Documents needed to open a Fixed Deposit Account

Identity Proof

Address Proof

  • PAN

  • Passport

  • Voter ID Card

  • Driving Licence

  • Govt ID Card

  • Photo Ration Card

  • Senior Citizen Card for proof of age

  • Passport

  • Telephone Bill

  • Electricity Bill

  • Bank statement with cheque

  • Certificate or ID issued by post office

Taxation provisions related to Tax Saving Fixed Deposits

The income earned from fixed deposits is classified under the head “Income from other sources”. The interest earned from these deposits is fully taxable. The tax is deducted at source (TDS) from the financial institution of the depositor at the time of crediting interest in the depositor’s account and not when his FD matures. The tax so deducted by the financial institution is deposited in the account of Central Government.

Also Read: TDS Rate Chart for the Financial 2021-22

As per the current Income Tax laws, under Section 80C, an individual can claim a tax deduction on investment in tax saving FDs of up to Rs. 1.5 lacs per financial year. This amount will be deducted from the total gross income of the individual to arrive at the taxable income.

Criteria to claim deduction under Section 80C

– Only individuals and Hindu Undivided Families can claim deduction under Section 80C
– Tax saving fixed deposits need to have a 5 year lock in period
– Interest earned on these Fixed Deposits is taxable under the investor’s tax bracket, therefore, Tax Deductible at Source (TDS) is applicable. The interest payable on the investment is either on a monthly basis or quarterly basis, this interest may be reinvested.

TDS applicable on Fixed Deposit Interest

Individuals < 60 years – 10% for amount above Rs. 40,000
Individuals > 60 years – 10% for amount above Rs. 50,000

If the amount of interest is below Rs. 10,000, then no TDS shall be deducted
If the depositor does not furnishes his PAN card, then TDS shall be deducted @20%.

Things one should know about Tax Saving Fixed Deposits

1. Investment in fixed deposits can be done only by individuals and Hindu undivided families.
2. The amount invested in fixed deposited will be deducted from the gross total income of depositor.
3. The deduction of investment in fixed deposits can be claimed under Section 80C of the Income Tax Act.
4. The fixed deposit requires a certain minimum amount, specified by the relevant financial institution, to be deposited.
5. To claim deduction on these deposits, minimum lock in period of 5 years is required.
6. Fixed deposit investments can be done in financial institutions like bank (public or private), NBFCs, post offices, etc.
7. Post Office Time Deposit for 5 years qualifies as tax deduction under Section 80C of the Act.
8. Deposits from one post office can be transferred to other office.
9. Fixed deposits account can be opened in the name of individual or jointly
10. The interest earned on fixed deposit is taxable
11. The tax saving fixed deposits allow nominations
12. Form 15G is to be submitted for individuals below 60 years of age, if the income is below taxable limit and Form 15H is to be submitted in case of senior citizens for non deduction of TDS by the relevant financial institution.

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