In the Finance Bill of 2006, the government had announced Tax benefits to Bank Term Deposits which are of over 5 year tenure u/s 80C of IT Act, 1961 vide Notification Number 203/2006 and SO1220 (E) dated 28/07/2006.
The salient points of the scheme notification are; (a) Fixed tenure without premature withdrawal. (b) Year is defined as a financial year. (c) Amount limited to Rs. 100 minimum and Rs. 100,000 maximum. (d) Bank will issue a Fixed Deposit Receipt that shall be the basis of claiming tax benefit. (e) Term deposit under this scheme cannot be pledged to secure a loan.
Benefits of tax break u/s 80C of IT Act Benefit Illustrator Example
Assume that a customer invests Rs 1,00,000 in this scheme @ 8% p.a. in fixed deposit for five years. He will get a benefit of Rs 30,900 at 30.90% (including Education Cess) on the eligible investment of INR 1,00,000 assuming that he is in Rs 2,50,000 lac to Rs 10,00,000 lac tax bracket, thus his effective investment would be Rs 69,100. He would earn Rs 8,000 (8% on 1 lac) as interest per annum, which would translate to a return of 11.5% on the effective investment of Rs 69,100.
- Two schemes TDGRI (Reinvestment Type) and TDGQI (Quarterly Interest Type).
- Minimum and Maximum Deposit Amount: The minimum deposit amount will be INR 100 or multiples thereof and maximum deposit amount will be INR 100,000
- Lock-in-Period: Since there is an underlying tax advantage u/s 80C of IT Act, there would be a lock in period of at least 5 years on the FD under this scheme.
- Type of deposit: Two types of deposits are to be offered under the scheme, one providing for quarterly compounding/reinvestment of interest (RIC scheme) and the other providing for quarterly payout of Interest (QIC scheme) to the designated operative account of the depositor.
- Premature closure of Fixed Deposits:. A minimum lock in period of 5 years is stipulated to enable the deposit to be assessed as exempt from taxable income u/s 80C of the IT Act.
- The maturity period of a term deposit receipt of any denomination shall be five years commencing from the date of the receipt.
- No term deposit shall be en-cashed before the expiry of five years from the date of its receipt
- Fixed Deposit Receipt: As per the scheme notification, tax benefits under this scheme are to be claimed through the Fixed Deposit receipt issued by the Bank.
- Tax Deducted at Source: Fixed Deposits with the bank shall be subject to Tax Deduction at source as per Income Tax Act 1961.
- Interest on these term deposits shall be liable to tax under the Act, on the basis of annual accrual or receipt, depending upon the method of accounting followed by the assessee.
- The tax on such interest shall be deducted in accordance with the provisions of section 194A or section 195 of the Act.
*For all new Reinvestment Term Deposits to be opened on and after 1st August, 2013 and all existing Reinvestment Term Deposits that may be renewed on and after 1st August, 2013, interest reinvested would be net of TDS and hence the maturity value would vary to that extent.