Kids are scared of ghosts and the bogeyman. Adults? Adults fear doing their taxes. Come the end of the financial year, we all find ourselves running around trying to find ways to emerge unscathed from the process while saving as much of our money as possible. This is where tax saving FDs come in: they are your most trusted friends on the market to park your money with, make steady returns on solid interest rates, and claim tax benefits!
Sounds too good to be true? Hang in there, and read on to learn everything you need to know to about FD tax rates to start investing in tax saver FDs!
Key Takeaways
- Tax saving FDs are a kind of tax saving financial instrument that are exempt from tax (upto a certain limit) under Indian tax law.
- Tax saving FDs work a lot like regular fixed deposit accounts: you deposit a fixed sum of money (not exceeding Rs. 1.5 lakhs in a year) for 5 years at a fixed interest rate. Once the plan matures, voila! You have your money back with its interest earned, and you don’t have to pay a paisa in taxes!
- Regular FDs, on the other hand, have no limits on tenure or principal amount invested; however, income tax on FD is applied according to your tax bracket. This can really add up once you get serious about investing!
Difference Between FD and Tax Saver FD
A fixed deposit works exactly the way its name promises: you deposit a fixed sum of money for a fixed period of time at your bank, and your investment earns interest at a steady – fixed, yes! – interest rate over the tenure of investment. FDs are great investment plans if you don’t want to take marked related risks with your money but still want higher returns than what your savings account can get you. Sounds pretty perfect, but you might find yourself asking: Is FD interest taxable? The answer is yes, there’s a tax on FD interest.
So, is interest on fixed deposit taxable? Tax saving fixed deposits are given tax benefits under section 80C of Indian tax law as detailed by the Income Tax Act of 1961. When you put your money in a tax saving FD, your interest returns will not be taxed until you hit a limit of Rs. 1.5 lakhs in your FD deposit in a given financial year. That’s a lot of saving in taxes!
How to open an FD account?
Like with most things in life these days, fixed deposits, be they tax free FDs or the regular kind, can be opened online as well as offline. If you’re wedded to the accessibility of the internet and the way it allows you compare terms and benefits across banks and other financial institutions, here’s how you can open a tax saving FD online.
- You’ll begin by heading to the website of the provider. This can be the netbanking portal of the bank you already have a savings account with or a non banking financial company (NBFC) of your choice.
- Log in with your credentials or open a new account with them as you require.
- Navigate to the deposits section of the website and choose the “open an FD account” option.
- This is where you’ll get up close and personal with the process, specifying all those fixed things about the deposit: how much are you depositing and how long for? Are you specifying a nominee with control over your deposit?
- Once you confirm these details, you can leave your money in the deposit to earn that sweet sweet interest.
- Be sure to save all documentation as proof of the investment! PDF files or print outs are a good way to go.
If you know exactly where you want to open the deposit and also fancy a walk or a drive, you can head to the nearest branch of your chosen bank or NBFC. Everything else is pretty much the same: you find a bank official and tell them you want to open an FD. If you have an existing account with them, you just need to fill a form and make the payment, and you’re good to go! If you don’t have an account with them, you’ll need to offer some ID proof – passport, Aadhaar card, PAN card, etc. – to open the account. These details are mandatory for tax saving FDs; because your account already has these details, they don’t need to be given again if you are an existing account holder with the institution.
Did You Know?
We really love our FDs in India. In the financial year of 2020, Indians held over 37 trillion rupees in savings deposits as part of their individual financial assets.
Features of a Tax Saving FD
Fixed deposit income tax exemptions can be claimed with tax saving FDs. Here are some of the essential features of tax saving FDs that you should know about before you decide to leap the leap and invest in a tax saver FD.
Principal amount invested.
You can invest up to Rs. 1.5 lakhs every year in tax saving deposits with a non-negotiable lock in period of 5 years. The government places this limit to ensure that the tax benefits afforded to investors do not exceed a specific amount. You have the freedom to invest as much as you like in regular fixed deposits.
Investment tenure.
Tax saving FDs have a fixed lock in period of 5 years. This deposit can also be renewed and reinvested once along with its interest, allowing you to slightly surpass the 1.5 lakh limit. Normal fixed deposits, on the other hand, can be endlessly renewed for as long as you like.
Liquidity.
The lock-in period of tax saving FDs cannot be broken under any circumstances. Once you put your money in the deposit, you simply can’t touch it for 5 years. Normal FDs, on the other hand, are usually pretty liquid and can be accessed easily, albeit sometimes with a small penalty.
Returns on interest.
Unlike regular deposits, which offer options for payouts based on returns from the interest earned over specific periods of time such as yearly, quarterly, etc., you get your returns only after maturity with tax saver FDs.
Fixed deposit tax exemptions.
Tax on FD interest in 2022 applies as follows. When you spring for a tax saving FD, you won’t pay any income tax on interest on the fixed deposit. While there is a tax on fixed deposit interest rates based on your income slab, you are free of income tax on interest earned on tax saving FDs up to 1.5 lakhs every year according to section 80C of the Income Tax Act of 1961.
What is a Tax Saving FD?
A tax saving FD works exactly like a regular FD with a few extra rules and stipulations around the investment. You earn interest on tax saving FD rates on an investment that cannot exceed Rs. 1.5 lakhs in a year in special tax saver FDs for five years. Other investment choices like tax saving FDs include savings schemes, PPF schemes, and even insurance. However, the tax exemption only applies to Rs. 1.5 lakhs in total across these tax saving investments.
Who Can Invest in a Tax Saving FD?
Individuals and Hindu Undivided Families (also known as HUFs) are allowed to invest in tax saving FD schemes. This statement might seem obvious, but companies and corporations are also allowed to have fixed deposit accounts – however, they cannot use them to duck taxes!
Taxation Rules on FD & Interest Earned on it
So you might find yourself asking how exactly interest on fixed deposit is taxable. Interest earned on FDs are taxed based on the tax bracket you fall in. However, as with many money-related matters, things are never that simple.
Banks usually take a 10% tax deducted at source (TDS) every year on the interest your FD earns regardless of whether you fall in a tax bracket or not. This sure makes live easier if it aligns with your tax bracket; however, you end up being unnecessarily taxed if you don’t make enough to fall in a bracket! The good thing is that this TDS only applies if your interest earnings run over Rs. 10,000 in a financial year.
Tax saving FDs can offer very lucrative benefits when taxes apply. Let’s say you fall in the highest tax bracket of 30% and are already investing the highest amount possible – Rs. 1.5 lakh – in tax saver FDs. You’ll save around Rs. 45,000 in taxes!
Word to Remember
Tax brackets: FD interest rate returns are taxed based on the tax bracket you fall in once it exceeds Rs. 10,000; this can range from nothing at all to 30%. That’s a lot of money you’ll pay in taxes if you’re investing large amounts of money. Tax saving FDs are a great way to lower this burden!
Conclusion
How to save tax on FD interest?
A tax saving FD, as the name suggests, works much like a regular FD; the difference, however, lies in taxation. Returns based on interest earned through fixed deposits are subject to taxation according to the tax bracket you fall in. What you’ve earned is added to your total income and then taxed based on the income tax that applies on your total income – and this process takes place annually. If you’re looking for ways to reduce your tax burdens, a tax saving FD may be just what you need in your investment plan.
FAQs
You can invest up to Rs. 1.5 lakhs in a financial year in tax saving financial instruments like tax saving FDs, PPFs, and insurance plans.
If you fall in the highest tax bracket and make your tax saving investments, you can claim tax benefits of around Rs. 45,000.
Yes. Tax saving FDs have a non-negotiable lock in period of 5 years.
