Tax Saving Fixed Deposits: An Easy Exemption from Taxes

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Want to know how to keep your hard earned money safe and secure? The best way is investment. Now, investment in which plan? I am sure you will invest in the plan that yields you good returns at minimum risk. So, here is the plan you are looking for. The plan that guarantees a complete return of invested amount along with the interest. Well, we are talking about fixed deposit. But are they tax free? No, they are not. You need to pay the tax, if the amount of interest exceeds certain limit. Want to save taxes on fixed deposits? There is a solution to this as well.

Under Section 80C of the Income Tax Act, 1961 you can avail the benefit of saving taxes on the fixed deposits. This facility is available in both the government and the private sector banks. You get tax exemption on your savings and the interest is paid at the fixed rate. 

Key Features Of Tax Saving Fixed Deposit

  • Simple booking process
  • Interest paid at a fixed rate
  • Senior citizens get higher returns
  • Interest is quarterly compounded
  • Amount locked-in for 5 years
  • Premature withdrawal not permitted
  • Overdraft/Loan facility not available
  • Investment amount limited upto Rs.1,50,000
  • Interest earned is taxable
  • TDS is deducted every year

Benefits of Investing in Tax Saving Fixed Deposit
The reasons why one will like to invest in the Tax Saving Fixed Deposits are:

  • Easiest way to save taxes– Investing money in this scheme is the best method to save taxes. If the interest paid by the bank is within income tax free limit you need not pay any tax. 
  • Higher interest is paid on this plan– Some banks pay interest at rates higher than the interest rates prevailing for the same time duration. 
  • Greater returns– This scheme assures high returns in comparison to other tax saving investments. Moreover, it is a risk free investment.
  • Additional interest paid to senior citizens– Citizens of or above 60 years of age receive interest at special rates, which is greater than the rate of interest for the general public.
  • Small investment amount– The minimum deposit amount is as low as Rs.100. Anyone interested in investing in this scheme can open an account with the mere amount of Rs.100.
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Limitations of Investing in Tax Saving Fixed Deposit
This scheme comes with certain drawbacks and they are as follows:

  • Tax on Interest– The interest earned on investment is taxable. The interest is added to taxable income for calculation of taxes.
  • Tax Deductible at Source– Tax, ranging from 20%-30% is charged for the people belonging to higher tax slab. You need to fill in the form 15 G/15H for the tax refund.
  • Lock-in-period– Your investment is locked in for the minimum period of 5 years and you can't withdraw the amount before that.
  • Maximum Amount– Under this plan you cannot invest more than the amount of Rs.1,50,000.

Other Ways Of Saving Taxes
Below is the list of other ways to save taxes:

  1. Public Provident Fund (PPF) – The maximum amount one can invest under PPF is limited to Rs.1,50,000. The minimum tenure/lock-in period is 15 years and you can withdraw money only after 6 years of investment. However, you can avail loan facility after 3 years.
  2. National Savings Certificate (NSC) – It is a small saving scheme launched by the government. The duration of scheme is 5 years and 10 years. The maximum amount of investment is not fixed. The investor can avail loan by mortgaging the NSC. 
  3. Senior Citizen Saving Scheme (SCSS) – One can avail the benefit of this scheme upto the maximum investment of Rs.15,00,000. The duration of the scheme is 5 years and can be extended for the period of 3 years. The premature withdrawal is allowed after 1 year of investment.
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You can compare among the schemes mentioned above and opt for the one that suits you the most.

Table comparing Tax Saving Scheme and other Ways of Saving Taxes (PPF, NSC, SCSS)

BasisTax Saving SchemePPFNSCSCSS
Lock-in-Period 5 years15 years5 years &10 years5 years can be extended for 3 years
Interest RateDepends on bankDepends upon 10 year Government bond yield
Changes yearly
Depends upon 10 year Government bond yield Depends upon 10 year Government bond yield
Maximum Investment Amount Rs.1,50,000 per financial year Rs.1,50,000 per financial year No limitRs.15,00,000
TDS ApplicableNot applicable ApplicableApplicable
Loan/Overdraft Facility Not available After 3 yearsLoan on NSC mortgage Not available
Premature Withdrawal Not allowed After 6 yearsNot allowedAfter 1 year
Available in Bank and Post Office BankBank and Post Office Bank and Post Office