The Truth About Tax Saving Fixed Deposits: What You Need to Know

When it comes to saving tax, Fixed Deposits that offer tax deductions are probably among the first alternatives that come to mind. They are easy, secure, and hassle-free means of reducing tax liability while growing one’s savings. But is it a good option for you?

Let’s break this down so that you can make an informed choice.

Table of Contents

What is a Tax-Saving Fixed Deposit?

A taxsaving Fixed Deposit is a special type of term deposit that allows you to claim tax deductions under Section 80C. You can invest a maximum of ₹1.5 lakh in a financial year and avail yourself of a deduction on that amount. Great, isn’t it? But there are a few all-important things to remember before you plunge into this.

Who should invest in a Tax-saving FD?

If you want an investment that is reliably safe with guaranteed returns.
If you do not mind locking money for five years.
If you are in a tax slab that concerns you less over taxable interest.

However, if you want high returns or more liquidity, you can look into some other tax-saving schemes.

How is the Tax Saving Fixed Deposit Opened?

You can open this FDD online or by visiting your nearby bank. The paperwork done primarily carries a PAN card, an Aadhaar card, and a bank account. Most banks offer this facility through net banking, making it the fastest and most hassle-free way to invest.

[ Read About: Tax-Saving Fixed Deposits: Benefits and Limitations ]

Lock-in period: No access for early withdrawals

In contrast to standard Fixed Deposits, tax-saving Fixed Deposits have a compulsory five-year lock-in period. This dictates that money cannot be withdrawn before maturity. So if you think that you will need your funds before five years, then you must explore investment avenues with flexible withdrawal features.

Interest rates: Competitive but taxable

Regular tax-saving Fixed Deposits carry competitive rates of interest. Nevertheless, the interest accrued will be taxed in full. This is an aspect that many investors overlook. While tax deductions apply to the principal invested, interest normally adds to one’s income and is taxed accordingly. In case you are in the higher tax slab, the returns may take a dent.

Comparison of Tax Saving FD with Other Options Under 80C

PPF: Offering tax-free returns but carrying a cumbersome fifteen-year lock-in period, with partial withdrawals only permitted after a few years.
ELSS: Having a shorter lock-in of three years, promising a chance of higher returns alongside market risks.
NSC: This has a fixed tenure and is guaranteed, except that interest earned is taxable.

Every option possesses its pros and cons, so your decision is dependent on your financial aims or your risk appetite.

Things to keep in mind before investing

Plan for the liquidity of funds: Ensure other liquid assets are available in your case of emergencies, as funds remain tied up for five years.
Check out the interest rate: Rates vary across banks. It’s advisable to check them and compare them before making your decision.
Calculate your tax bracket: If you are earning in the higher slab, the tax on the Interest may reduce your overall gains.
Nomination facility: You must also add a nominee to your FD to ensure easy transfer in an unfortunate event.

Making the right choice for your financial future

Tax saving Fixed Deposit is one of the best options of investment for those who like to opt for the secure form with tax saving benefits. But it is not the only option available. Weighing the pros and cons can help you find out if this suits your financial needs.