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Planning for 5 Year Tax Saving Fixed Deposit? List of Things to Check

Archana L

Saving for the future is one of the best things which every individual can do to safeguard themselves in long-run. Today several banks and financial institutions are offering an array of investment options to help people to reap rich benefits from savings. The Income Tax law in India to some extent promotes the idea of savings amongst earning people to park their funds in tax saving instruments. One such investment avenue which helps the investor to fetch handsome reward on their investment is the 5-year tax-saving fixed deposit.

Let's take a peek view to understand the meaning of fixed deposit and its benefits.

What is a Fixed Deposit?

Fixed Deposit or FD is a kind of financial instrument offered by banks of non - banking financial companies which provides investors with an interest rate (higher than the savings bank account), upon maturity date. It is also popularly known as a term deposit or time deposit. Interest on fixed deposit will be paid every three months starting from the date of deposit.

The interest amount on the fixed deposits will either be credited to their savings bank account or it will be paid to the investor on maturity.

What is a Tax Saving Fixed Deposit?

The tax-saving fixed deposit is a kind of fixed deposits which offers tax deduction to the investors as per Section 80C of the Income Tax Act of 1961. An investor can invest up to Rs 1,50,000 per annum in tax-saving fixed deposit and claim for rebate under income tax.

The tax-saving term deposits come in for a five-year tenure and the depositor cannot go for withdrawal before the completion of maturity tenure. As tax-saving fixed deposits are debt investment, it is safer when compared against the equity-based tax saving instruments such as ELSS schemes.

5 - Year Tax Saving Fixed Deposit interest rates in SBI is 6.85% per annum, whereas the interest rate of fixed deposit in the post office for five years stands at 7.7% per annum.

Benefits of 5 – Year Tax Saving Fixed Deposits

  • Offers high-interest rates compared to the normal term deposits.
  • Lock-in period is 5 years.
  • The risk factor associated with tax-saving fixed deposit is nil.
  • Best suited for risk-averse investors.
  • Tax Deducted on Source (TDS) from the interest earned on FDs is applicable.
  • An investor can only deposit a one-time lumpsum amount.
  • Invested amount is completely safe and returns are guaranteed.

Benefits of 5 – Year Tax Saving Fixed Deposits

  • Non - Resident Indians can also invest in tax-saving fixed deposits.
  • Earn tax deduction of up to Rs 1.50 lakh per annum under Section 80C of the Income Tax Act 1961.
  • The minimum deposit amount varies from one bank to another.
  • Get loan facility on the fixed deposit at a lesser interest rate.
  • The premature withdrawal facility is not available until the completion of the 5 - year lock-in period.
  • Nomination facility is available.
  • Senior citizens will get an extra 0.50% addition to the existing interest rate
  • It provides an option of a joint account, in which only the primary account holder will have an eligibility to claim for tax benefits.

Eligibility Criteria for 5 Year Tax Saving Fixed Deposits

  • Any individual can open the 5-year tax-saving fixed deposit
  • Resident Indian
  • It can be opened in a single and joint account
  • Hindu Undivided Family (HUF)

Let's understand a list of things to check before investing in a 5 - Year Tax Saving Fixed Deposit:

List of things to check before investing in a 5 – Year Tax Saving Fixed Deposit:

  • This fixed deposit can be opened with a minimum amount, which usually varies from one bank to another.
  • An investor can park their funds in these term deposits through any public or private sector banks (the exception here is co-operative and rural banks).
  • Only individuals and Hindu Undivided Family (HUF) can open a five-year tax-saving fixed deposit scheme.
  • The lock-in period for these deposits stands at 5 years.
  • Any kind of premature withdraw or loan facilities is not allowed on these fixed deposits.
  • Investment in five years fixed deposits qualifies for exemption under Section 80C of the Income Tax Act 1961.
  • These fixed deposits can even be opened at a post office (Post Office Time Deposit) which is also eligible for securing deduction.
  • The fixed deposit opened in a post office can be transferred from one post office to another.

List of things to check before investing in a 5 – Year Tax Saving Fixed Deposit:

  • Nomination facility on the 5 - year tax saving a fixed deposit is available.
  • One can either operate this fixed deposit either in 'Single' or 'Joint' mode of holding. In case of a joint mode of holding, only the primary depositor (first holder) can claim the tax benefits.
  • The interest rates offered on the five-year tax-saving term deposits in banks is slightly higher to senior citizens as compared to a normal citizen.
  • The 5-year post office time deposit does not offer any kind of differential interest rates to senior citizens and non - senior citizens.
  • The interest earned is taxable (based on investor's tax bracket).
  • The interest amount on the deposits is payable either monthly/quarterly or it can be reinvested.
  • An investor can avoid TDS deduction on five-year tax savings fixed deposit in banks by submitting Form 15G (Form 15H in case of senior citizens).
  • Senior citizens are eligible to claim a deduction of Rs 50,000 on the interest earned from this investment scheme as per Section 80TTB of the Income Tax Act.

About the Author

Archana is a Content Writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.

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