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Tax Exemption on Fixed Deposit

Home Fixed Deposit Tax Exemption on Fixed Deposit

An effective way of saving income tax is to invest in fixed deposits that are eligible for tax deduction under section 80C of the income tax Act. Fixed deposit is known to be a type of investment instrument that offers a lucrative rate of interest. The rate of interest offered by a fixed deposit is higher than the rate of interest offered by a savings account. Investment in Fixed deposits is considered one of the most convenient and safest ways of investment. In the year 2006, the Government of India had introduced tax exemption in fixed deposits invested for 5 or more years to boost the investments by retail investors in fixed deposits. Let us now understand the working of these tax saver fixed deposits.

Updated: 16-05-2022 15:34:19 PM


What are the features of a tax saver fixed deposit

Following features of the tax saver fixed deposits should be considered before investing in these financial instruments:

  • Tax saver fixed deposits have a lock-in period of 5 years.
  • The holder of a tax-saving fixed deposit can get a tax deduction of a maximum of Rs. 1.50 Lakh.
  • These fixed deposits are available in two types:
  • Single Holder: This type of fixed deposit is held by a single person and the investor can claim the tax deduction for his investment in fixed deposit.
  • Joint Holder: As the name suggests this type of fixed deposit is jointly held. Two or more persons can hold a single tax saver fixed deposit instrument. But do remember that only the first holder of this kind of fixed deposit can claim the tax benefit.
  • The tax deduction for fixed deposits under section 80C can be availed by Individuals, Senior citizens, Non-Resident Indians, Members of HUF i.e. Hindu Undivided Families.
  • TDS is applicable on the interest earned from these tax saver fixed deposits.
  • Owing to the lock-in period of 5 years, premature withdrawal or partial withdrawal is not allowed for tax saver fixed deposits.
  • The loan facility cannot be availed against these tax saver fixed deposits.

Who can invest in tax saver Fixed Deposit

Investment in tax saver fixed deposits can be done by the following category of people:

  • Individuals who are resident Indians,
  • Non-Resident Indians,
  • Senior citizens,
  • Members of Hindu Undivided Family

Remember that all the above-mentioned investors should have a PAN CARD for investing in the tax saver fixed deposits. If you do not have a PAN CARD then you first need to apply for the same and only then you can invest in these.

What are the benefits of investing in a tax saver fixed deposit

Tax saver fixed deposit have numerous benefits that are listed as follows:

  • The primary benefit of a tax saver fixed deposit is the significant tax savings that it offers. The amount invested in tax-saving fixed deposit is deducted from gross total income to arrive at your taxable income.
  • Investing in tax saving a fixed deposit is very easy – you can avail of them through either public or private sector banks. You have to open an FD account with the bank from where you wish to invest in this fixed deposit. Opening of account and investing in the tax-saving fixed deposit can be done online or at your bank’s branch.
  • The minimum investment amount differs from bank to bank.
  • Investment in tax saving a fixed deposit is risk-free as they offer guaranteed returns and are completely secure.
  • Tax-saving fixed deposit offers an attractive interest rate. Senior citizens are offered a higher rate of interest as compared to other investors.
  • The tax-saving fixed deposit offers a nomination facility i.e. the holder of the instrument can nominate any person to whom the money can be given in case of death of the holder.
  • Investment in tax-saving fixed deposits can be made at any time of the year. These are not like government-issued tax-free bonds that are available only for a certain time frame.
  • Interest is paid on a yearly, quarterly, or monthly basis.

Thus any individual, Senior Citizen, Non-Resident Indian, Member of HUF who is looking for a short-term, locked-in financial instrument offering guaranteed returns along with tax saving should definitely opt for these tax saver fixed deposits.

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