Every investment decision primarily revolves around two major factors: the rate of return and the level of risk. Those who want to prioritize low risk over high returns, opt for fixed deposits – which are always one of the safest investments, but offer surprisingly low returns. Interest income on fixed deposits is taxable, however, as an investor, you can get tax exemption under section 80C equal to the amount deposited in FD.
What are Tax Saving Fixed Deposits?
Tax Saving Fixed Deposit is a savings instrument that not only provides assured returns but also helps you save income tax through exemptions given under Section 80C of the Income Tax Act, 1961.
One can open a tax saving fixed deposit of minimum amount 100, and max 1.5 lakh. The deposit has a lock-in period of five years. Tax saving deposit offers monthly or quarterly interest payments. If the deposit is opened jointly by the account holder and his wife, the tax benefit is given to the primary holder.
Tax Saving Fixed Deposit has the following salient features:
1. The amount invested in Tax Saving Fixed Deposit is exempted from Income Tax up to maximum 1.5 lakh.
2. However, the interest earned on FD is taxable.
3. Interest is calculated on quarterly basis. At the time of interest reinvestment, the previous quarter’s interest is added to the principal for the purpose of compounding.
4. It is one of the safest forms of investment.
5. Tax Saving Fixed Deposits have a lock-in period of five years.
6. Unlike regular FDs, tax saving FDs do not allow premature withdrawal or loan against it.
7. The interest rate offered on it remains constant for five years.
Hence, we can conclude that tax saving fixed deposits are an investment option preferred by conservative investors who choose the safety of capital over the size of the returns.
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