Investing in Tax-Saving Fixed Deposits (FDs): 10 Important Things to Keep in Mind
When it comes to saving taxes, fixed deposits (FDs) remain a popular choice among Indian investors. FDs offer guaranteed returns and income tax benefits under Section 80C of the Income Tax Act up to ₹1.5 lakh per annum. However, before investing in tax-saving FDs, here are ten crucial things you need to keep in mind.
1. Eligibility and Maximum Investment Limit
Tax-saving FDs can be purchased by individuals or Hindu Undivided Families (HUFs), but not by trusts, companies, or partnerships. The maximum investment limit is also ₹1.5 lakh per annum.
2. Lock-in Period
Tax-saving FDs have a lock-in period of five years. Premature withdrawals are not allowed, except for certain situations like the death of the investor.
3. Interest Rates
The interest rates offered on tax-saving FDs are usually slightly higher than those of regular FDs. Currently, most banks and post offices offer interest rates ranging from 5.5% to 7.5% per annum.
4. Depositing Mode
Tax-saving FDs can be deposited either online or offline. Online deposits are generally faster and more convenient, but offline deposits may allow you to negotiate higher interest rates.
5. Nomination Facility
Nomination facility is available for tax-saving FDs. This means that you can designate a person to receive the deposit amount in case of your death.
6. TDS Deduction
Tax-saving FDs are subject to TDS (Tax Deducted at Source) at the rate of 10% on interest income exceeding ₹40,000 per annum. However, if your total income is below the taxable limit, you can submit Form 15G/H to avoid TDS deduction.
7. Taxation of Returns
Returns on tax-saving FDs are fully taxable at the investor’s slab rate. Therefore, it’s important to consider the tax liability while calculating the net returns.
8. Automatic Renewal
Tax-saving FDs usually have an automatic renewal facility, which means that the deposit amount will be reinvested for another five years unless you specify otherwise.
9. Credit Rating
Before investing in tax-saving FDs, it’s important to check the credit rating of the bank or post office. Higher credit rating ensures that your investment is safe and there’s low risk of default.
10. Comparison with Other Tax-Saving Instruments
Finally, it’s important to compare tax-saving FDs with other tax-saving instruments like Equity-linked savings schemes (ELSS), Public Provident Fund (PPF), and National Savings Certificate (NSC). Depending on your investment goals and risk appetite, you may find other options more suitable.
In conclusion, tax-saving FDs can be a reliable and simple way to save taxes and generate guaranteed returns. However, it’s important to keep these ten things in mind before making an investment decision.
