Each investment decision primarily revolves around two key factors: rate of returns and level of risk. Those who want to prioritise low risk over high returns tend to choose fixed deposits – which are invariably one of the safest investments but, unsurprisingly, offer low returns. The interest income on fixed deposits is taxable, however, as an investor, you can seek tax exemption under section 80C equivalent to the amount deposited in an FD.
What are tax saving fixed deposits?
Tax saving fixed deposits are a savings instrument that not only offer fixed returns, but also help you save income tax via exemption given under section 80C of the Income Tax Act, 1961.
One can open a tax saving fixed deposit of a minimum amount of ₹100, and a maximum of ₹1.5 lakh. The deposit has a lock in period of five years. The tax saving deposit offers either monthly or quarterly interest payout. In case the deposit is opened jointly by an account holder and his spouse, the tax benefit is given to the primary holder.
Tax saving fixed deposit has following key features:
1. The amount invested in tax saving fixed deposit is exempt from income tax upto a maximum of ₹1.5 lakh.
2. The interest earned on the FD is, however, taxable.
3. Interest is calculated on a quarterly basis. At the time of reinvestment of interest, the interest of the previous quarter is added to principal for the purpose of compounding.
4. It is among the safest forms of investments.
5. The tax saving fixed deposit has a lock in period of five years.
6. Unlike a regular FD, tax-saving FD does not allow premature withdrawal or loan against it.
7. The interest rate offered on it remains fixed for five years.
So, we can conclude that tax saving fixed deposit is an investment option preferred by conservative investors who tend to choose safety of capital over the size of returns.