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Don’t Keep Tax Planning For the Last Minute. Invest in a Tax-Saver FD Today!

7 mins January 23, 2019

A variety of investment avenues are available today, each possessing unique traits and suitable for investors with diverse risk profiles. So, when you invest, make it a point to recognise the key features of the investment avenue so as to own the most appropriate ones — as per your risk profile, investment objective, financial goals, and the time horizon. Doing this enables you to complement tax planning with investment planning.

For your tax-saving too, while there are a variety of investment instruments that qualify for a deduction under Section 80C of the Income-Tax Act, 1961, selecting tax-saving investments congruent with your risk profile would be a far more fruitful exercise.

The market-linked investment instruments are best suited for risk-takers; while if you are averse to taking risk, consider tax-saving investments that offer an assured return, where the risk of capital erosion is almost zero. One such investment avenue is the 5-year tax-saver FD.

Wedding Set Up

The 5-year tax saver FD is a worthy avenue

As per the provisions of Section 80C of Income Tax Act, 1961 resident individuals and Hindu Undivided Families (HUFs) can avail a deduction of up to Rs 1.5 lakh by investing in a tax-saver FD.

A tax-saver bank FD is subject to a lock-in period of 5 years. So, a tax-saver FD cannot be prematurely encashed/liquidated/withdrawn before the completion of 5 years from the date of receipt. This lock-in, in a way, is good to compound wealth safely and steadily.

A tax-saver FD comes with three options: Tax Saving - Reinvestment Deposit; Tax Saving - Quarterly Interest Payout; or Tax Saving - Monthly Interest Payout; you can choose the one most suitable for you as per your cashflow needs.

The minimum amount you can invest is Rs 100 or in multiples thereof, with an upper limit of Rs 1.50 lakh in a financial year. The deposits can be held in a single name, or jointly (by two adults or by an adult and a minor), but in case of joint holdings, the Section 80C deduction benefit is available only to the first holder who should be a PAN (Permanent Account Number) holder.

How much is the rate of interest?

The rate of interest varies across banks. Axis Bank is currently offering 7.00% p.a. (and +0.50% more for senior citizens) on a 5-year tax-saver fixed deposit.

Is the interest earned on a tax-saver FD taxable?

As per the prevailing tax rules, the interest earned on a tax-saver bank FD is taxable as ‘Income from Other Sources’. The tax is deducted at source by the bank.

The rate for TDS (Tax Deduction at Source) is 10% if PAN is furnished; and if not, TDS is 20%. No surcharge or cess is levied over and above this basic rate.

TDS with respect to interest earned on the tax-saver bank FD is deducted based on the total interest projected on the aggregate of your bank FD for the financial year.

If the total projected interest in a financial year crosses the threshold limit, which is currently Rs 10,000 for non-senior citizens, TDS is deducted proportionately from the existing fixed deposits at the time of interest application. For senior citizens (60 years and above), the union budget 2018 increased the exemption of interest income on deposits with banks (includes fixed deposits) and post offices from Rs 10,000 to Rs 50,000.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.