Our Indian masses love to keep their surplus funds in fixed deposit for a very simple reason – it offers security as well as fixed return. A Tax Saving Fixed Deposit has an additional benefit, it aids in saving your income tax as well. There are several ways of investments through which you can save your tax, viz. NSC, PPF, NPS, Sukanya Samriddhi Scheme, ELSS, Mutual Funds, Term Insurance, etc. However, among all these above mentioned avenues, tax saving fixed deposit is the most preferred alternative. Before you step out to put your funds in these fixed deposit, first understand their characteristics, advantages and shortcomings.
Characteristics/ Advantages of Tax Saver Fixed Deposit
- It is easy to open a fixed deposit account with any government or private bank except cooperative banks. The facility is available for individuals and HUF. This account can be opened individually or jointly and is transferable from one branch of the bank to another branch.
- With tax saver fixed deposit, the depositor gets an interest at a fixed rate which remains fixed during the entire period of fixed deposit. Rate for senior citizens is little more.
- The minimum period for which the tax saver fixed deposit can be opened is 5 years. Even if you want, you cannot withdraw the period before maturity.
- It can be opened with a minimum amount of Rs. 100. However, there is a cap on the maximum level of investment. In one financial year, a person can at the most invest Rs. 1.5 lakhs in these deposits.
- Like other fixed deposits, you cannot borrow a loan from a bank by pledging your fixed deposit receipt.
- The amount invested in tax saving fixed deposit is eligible for deduction in tax under section 80C of Income Tax Act, 1961. If the account is jointly opened, then the tax benefits can be claimed by the first holder only.
- The amount of interest earned from these deposits is taxable in the hands of the depositor and just like any other fixed deposit, bank will deduct TDS at the end of each financial year. However, the deduction of TDS can be avoided by submitting form 15H/ 15G to the bank for each of your fixed deposit. If you have registered your PAN, then TDS will be deducted on the interest amount at the rate of 10%, otherwise at the rate of 20%.
- If by chance, your TDS has been deducted by bank and your total income falls below the level of tax free limit, then you can claim a refund at the time of filing your income tax return. For this purpose Form 16A by the bank (certificate of tax deduction) is used.
Shortcomings of Tax Saving Fixed Deposit
- One of the major shortcomings of tax saving fixed deposit is the lock in period of 5 years. However, with other tax saving instruments, you will get to face the same issue.
- The demoralizing factor in tax saving fixed deposits is that the interest earned on these deposits become taxable. Whereas, there are other sources where you don’t have to worry about the taxability of the earned income.
- TDS also pose a difficulty to most of the people. If you forget to fill the required form
(form 15H or 15G) at the beginning of the financial year, then bank will deduct TDS on the interest earned from these deposits. Further, if you have these accounts with 3 banks, then you have to fill the forms individually for all these 3 banks.
If you compare tax saving fixed deposit with other tax saving alternatives, then PPF and NSC also gives fixed return. In case of PPF, the lock in period is longest – 15 years but there is no tax on the returns from it. Lock in period in case of NSC is 5 years and 10 years, depending upon the duration you have chosen. Interest earned from NSC is also taxable.
Now, before taking any decision on investment in any type of tax saving alternative, evaluate your options and compare them in the light of your requirements (fixed income, duration, taxability, etc.) Choose a rational tax saving option and save your taxes that can result in more real money in your hands.