6 Reasons to Invest in a Tax Saving FD

Posted by John Judge on May 29th, 2021

Tired of paying taxes on your life savings? Here is a deposit scheme that fits your needs. Introduced in 2006 by the Finance Ministry, Tax saving Fixed Deposit is one of the best options for FDs and can shield you from paying heavy taxes on your savings. Let’s know more about tax saving FD.

A fixed deposit is a deposit option where a customer invests for a specific period on which he/she receives interest. The rate of interest varies in different banking and non-banking institutions and can also depend on the duration of the FD. By investing in tax-saving FD, a person is eligible for a deduction on his/her income under section 80C of ITA (Income Tax Act). A taxpayer can claim a deduction of up to 1.5 lakhs per year on the amount invested. Tax-saving FDs usually have a lock-in period of 5 years.

Here is why you should invest in a Tax-Saving FD-

  1. Easy Availability: Any individual can open a tax-saving fixed deposit with a bank or any non-banking organisation. Usually, there are no restrictions on who can invest in an FD. Hence anyone, including NRIs, self-employed individuals, small business owners, can invest in tax-saving FD and reap the benefits of a tax deduction if they have an open account in a bank or non-banking institution. A person doesn't need to open a Demat account or a trading account to invest in FDs.

  2. Most Favourable Secure 80-C Investment: Tax-saving FDs are secure investments while giving decent to good returns. They are not subject to market-related fluctuations, unlike other 80-C tax-exemption schemes such as ELSS. Moreover, the rate of interest also remains fixed by your bank or financial institution throughout the tenure of your FD. Hence, there is no risk involved in tax-saving FD.
  3. Flexibility and Tax exemption: Fixed deposits are usually flexible and can be opened individually or by two or more individuals as a joint fixed deposit. Tax-saving fixed deposits are one of the more secure forms of deposit where the investors can claim a maximum tax exemption of 1.5 lakhs under section 80C.
  4. Lock-in period: Tax Saving FD has a lock-in period of 5 years that ensures your investment is safe and secure until it matures. You can also choose to re-invest the amount and compound the interests for a higher return on investment. Among other secure 80-C eligible investment options, tax-saving FD enjoys the lowest lock-in period of just 5 years. The same for PPF (Public Provident Fund) is 15 years.
  5. Loan Against FDs: While you cannot break the FDs before 5 years lock-in period, most banks provide loans to FD holders against the deposits held with the bank. Being a secured loan, it helps borrowers take a loan at lucrative interest rates and friendly terms and conditions.
  6. Deposits are Insured: Deposits up to Rs 5,00,000 in a recognised bank are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme. This means even if the bank goes bankrupt, deposits in the bank are insured up to Rs 5,00,000.

Along with the tax-saving FD benefits mentioned above, this deposit scheme offers many additional privileges. All banks and financial institutions have a higher interest rate for senior citizens who invest in a tax-saving FD. Moreover, the minimum deposit amount in some lending institutions starts from only 1000 rupees!

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John Judge

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John Judge
Joined: February 19th, 2019
Articles Posted: 14

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