Tax Deductible on Fixed Deposits
A Tax-saving Fixed Deposit (FD) is an investment option offered by banks and non-banking financial companies. A tax-saver FD has a lock-in period of 5 years and offers a higher rate of interest than a regular savings account.
Moreover, regular savings accounts also do not offer any tax benefits.
A tax-saving FD offers tax deductions under section 80C of the Income Tax Act, 1961 of up to ₹1,50,000 in a year. This amount is deducted from an individual’s total gross income, arriving at the taxable income. Hence,
by investing in a tax-saver fixed deposit, you can reduce your taxable income and thereby, save on the tax payable on your income.
When you apply for tax-saver fixed deposits, any interest over ₹40,000 is taxable per FY 2020-2021. For FY 2019-2020, this amount was ₹10,000. The interest yielded gets added to your total income in a year. The interest
earned under tax deductible fixed deposits comes under the category of income earned from other sources under the Act. So, the tax applicable will be tax deducted at the source (TDS).
How to Avoid TDS on FDs?
You cannot completely avoid TDS on tax-saving fixed deposits, but there are a few ways to minimise the tax outgo under various provisions of the Income Tax Act. These include:
- Tax-saving with form 15G
You can avoid TDS on tax-saving fixed deposits if your annual income is below ₹2,50,000. You can use form 15G and submit it to your bank. Form 15G works as proof to the government that your income is below the taxable
limit and that you don’t have to pay tax.
- Tax-saving with form 15H
Form 15H is for senior citizens above the age of 60 years whose income does not exceed ₹2,50,000 in a year. Senior citizens can use form 15H to claim tax exemption under the interest earned in their fixed deposits.
- Tax-saving with a joint applicant
You can avoid TDS on tax-saving fixed deposits if you make a joint application for the fixed deposit. In joint applications, TDS gets waived off from the second applicant, and only the first applicant has to pay tax.
In the case of tax-saving FDs with joint applications, tax benefits are available only for the first applicant/account holder.
Things To Know About Tax Saving Fixed Deposits
Before you invest in tax-saver fixed deposits, here are some things to know about them:
- Tax-saver fixed deposits give guaranteed and systematic returns.
- Tax-saver fixed deposits are non-market-linked investments, so they carry zero risk and are safe investments.
- Senior citizens enjoy a higher interest rate on tax-saver fixed deposits. The interest rate is more than 0.25% to 0.5% than the general public.
- You can save up to ₹1,50,000 in a year with tax-saving fixed deposits under s80(C) of the Income tax act.
- You can make deposits with amounts as low as ₹100 in tax-saving fixed deposits.
- The maximum deposit amount in tax-saving fixed deposits is ₹1,50,000.
- Only Indian citizens and Hindu Undivided Families (HUFs) can invest in tax-saving fixed deposits.
Comparison with other Tax-Saving Investments
In comparison to other tax-saving instruments, the rate of interest is mediocre. However, the upside is that the tax-saver fixed deposit rates and returns
are guaranteed and risk-free. This is because the returns do not depend on the performance of the capital or stock market. Here are some other tax-saving investments with their rate of interest:
|Instrument||Type of investment||Interest rate||Lock-in period|
|Equity Linked savings scheme||Market-linked||10%-12%||3 years|
|Public Provident fund||Government scheme||7%-8%||15 years|
|Sukanya Samriddhi Yojana||Government scheme||7.6%||21 years|
|National Savings certificate||Government scheme||6%-8%||5 years|
|National pension scheme||Government market-linked scheme||8%-10%||Till retirement|
|Unit-linked insurance plan||Market-linked||7%-25%||5 years|
To know your tax-saver FD rates, you can use a fixed deposit interest rate calculator.