Tax-Saving FDs Explained: Benefits, Eligibility, and Tips

Saving in one of the easiest, most efficient ways through tax-saving fixed deposits is also ensuring steady returns on a particular investment. This article has explained what are tax saver FDs, their benefits, eligibility criteria and tips for making the most of these instruments.

Understanding Tax-Saving FDs

Understanding what are tax saver FDs  is really important in first understanding the fundamental structure. Tax-saving fixed deposits is a term deposit introduced by banks and financial houses which brings dual benefits of saving wealth and simultaneously saving tax on it also. All the investments from such FDs are available for deduction under Section 80C of the Income Tax Act up to ₹1.5 lakh.

These deposits have a fixed tenure of five years, wherein the amount cannot be withdrawn prematurely. They do guarantee returns, although the interest earned is taxed according to the applicable income tax slabs in India.

Key Benefits of Tax-Saving FDs

The most critical benefit of tax-saving FDs is that they qualify for deduction under Section 80C. So, this product stands as a most preferable and reliable option of secured investments in case the concept is concerned about what is tax planning.

•    Assured Returns: Compared to the market-related products, tax saving FD gives assured returns. It mostly comes within 5.5%-7.5%, respectively, as decided by a particular bank considering current market fluctuations.
•    Low Risk: Since a tax-saving FD is a fixed-income instrument, the risk factor is close to nil. It is thus ideal for conservative investors who believe safety is better than returns.
•    Easy to Open: It is easy to open a tax-saving FD either through an online process or a visit to a branch of a bank. The minimum documentation is required by most banks.
•    Flexibility in Investment: You can start investing with a minimum amount that varies from bank to bank, as low as ₹10,000.

Eligibility Criteria for Tax-Saving FDs

Knowing what are tax saving FDs also involves knowledge about who is eligible for investment in these schemes. The eligibility criteria include :

•    Individual and Joint Accounts: Individual and joint account holders both can invest in tax saving FDs. However, the tax benefit under section 80C is applicable only for the first account holder.
•    Resident Status: This scheme is open only for Indian residents and Hindu Undivided Families (HUFs). Non-Resident Indians (NRIs) cannot apply for this scheme.
•    Minimum and Maximum Investment Limits: The minimum depends upon the respective bank, while the maximum one that can enjoy the benefit of tax benefits is limited to ₹1.5 lakh for each financial year.
•    Tenure: Five years is a fixed tenure that cannot be negotiated and will ensure disciplined savings towards a medium-term goal.

Tips for Maximizing the Benefits of Tax-Saving FDs

•    Invest Early: Invest at the start of the year so that the full amount is disbursed and the load towards year-end is eased.
•    Compare Rates: Every bank has different rates for tax-saving FDs. Do your research and compare the rates.
•    Understand Tax Implications: Even though the interest so earned is tax-free, it is important to note that interest on this principal amount would be taxed. Net returns, therefore, should be calculated while taking taxes imposed as applicable in the offered Indian income tax slabs.
•    Investing by Laddering Your Deposits: Instead of investing the total sum in one FD, consider investing the sum across various deposits. This brings liquidity at varied intervals.
•    Nomination Facility: Use nomination facility for the safety of the future of your loved ones.

Tax-Saving FDs vs Other Tax-Saving Instruments

While planning for your tax-saving, you have to consider how tax-saving FDs compare with other instruments such as Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), and National

Savings Certificate (NSC):

•    Returns: The returns on tax-saving FD are guaranteed, whereas ELSS offers market-linked returns which may be higher but carry a higher risk.
•    Lock-in Period: FDs have a shorter lock-in period of 5 years as compared to PPF which is 15 years, but longer than ELSS that is 3 years.
•    Tax Implications: The interest earned on tax-saving FDs is taxable as opposed to PPF, which has both principal and interest as tax-free. So, knowing what are tax saver FDs requires understanding the pros and cons.
•    Risk: FDs are relatively safer as compared to ELSS which involves equity exposure.

Tax-saving FDs is the most reliable and straightforward form in which one can save tax and earn steady returns. Therefore, by knowing what are tax saving FDs and aligning it with your financial goals, you would be able to plan your investment better. Though they are not the highest return-giving instruments, yet security and simplicity make them quite popular, especially for those investors who are risk averse. Always remember the overall financial plan, your risk appetite, and your tax liabilities before investing in such instruments.