The vanilla fixed deposit schemes are investment plans that allow investors to deposit a lump sum amount for a fixed tenure with a bank or any other authorised financial institution. These come with a lock-in period where you get the said sum and interest on maturity.
Tax-saving FDs are a modern reiteration of FDs, allowing investors to benefit from fixed deposit income tax exemption. Investors who do not have high-risk propensity prefer tax-saving investments like this and tax-saving mutual funds.
You’re allowed a deduction of up to 1.5 lakh rupees as an investment in tax-saving FDs. This is under the Income Tax Act’s Section 80C of Chapter VI A. The amount of investment is deductible from your gross taxable income.
Section 80C allows any individual or HUF (Hindu Undivided Family) wishing to save tax on FD investment to invest in such an instrument and earn tax benefits. All they need is a new savings account, KYC verification, and other documents required for the process.
You can invest an amount as low as 500 rupees in tax-saving FDs. While there is no upper limit on the deposit amount, the maximum deduction you can claim is 1.5 lakh rupees against it. The depositor can choose the tenure of the tax-saving fixed deposit, and it can be anything between 7 days and 10 years. In most cases, the lock-in period is at least 5 years, and you are allowed partial withdrawal if you have chosen a longer tenure.
The interest rate varies depending on factors such as the age of the holder and lock-in tenure. Tax-saving FD rates can go up to 6% per annum. According to the tax slab you fall into, the interest part is fully taxable and is shown under the ‘Income from Other Sources’ head. The bank will also deduct a TDS of 10% if your total interest income from them exceeds ₹ 10,000 in a financial year. If you have not furnished your PAN number, the TDS rate will be 20%.
If you are nearing your retirement or looking for a feasible way to save on taxes, investing in a tax-saving FD is the right choice. It enables you to earn interest income and entails a deduction under Section 80C of Chapter VIA.
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