What Is Tax Saving Fixed Deposit?
14 Apr 2023
Table of Content
Opening a term deposit to earn interest income is an excellent way to make use of the funds lying in your bank account. But by opting for a tax saving fixed deposit, you can also earn interest income and get a tax benefit. Bank of Baroda’s Baroda Tax Saving Fixed Deposit helps you to save tax while earning income.
What Is Tax Saving Fixed Deposit (FD)?
Fixed deposit that offer tax exemption under Income Tax Act, Section 80C is the most preferred FD. The lock-in period is 5 years. Investing in this FD Scheme will offer an annual tax relief of 1.5 lakhs.
How Does a Tax Saving FD Work?
A tax-saving FD has a fixed tenure of five years. Although the interest accrued on the FD amount is taxable, one can claim a tax deduction of up to Rs. 1.5 lakh under Section 80 C of the Income Tax Act, 1961. This makes it different from other types of fixed deposits , which do not offer this tax-saving facility.
Key Features of a Tax Saving FD
- Eligibility: Only individuals and Hindu Undivided Families are allowed to open this tax saving fixed deposit. Deposits can be made in a single or joint name. As per Government of India guidelines, the Income Tax benefit is allowed to the first holder of this fixed deposit.
- Amount of deposit: The minimum amount of deposit allowed is Rs. 100 and in multiples of Rs. 100. The maximum amount in a financial year is Rs. 1,50,000.
- Tenure of deposit: The minimum lock in period for tax saving deposits is 60 months. The maximum tenure is 120 months.
- Payment of interest: Interest is compounded quarterly in a tax saving FD. Interest is credited to the accounts at the end of the quarter. This is one of the best tax saving deposits features.
- Premature closure: Premature closure of such deposits is not allowed until the maturity of the tax saving FD. This is allowed on customer’s request only after completion of 5 years at Bank’s discretion. The bank will pay interest at 1% below the tax saving FD interest rate in such cases. In case of death of depositor, premature withdrawal is allowed.
- Auto renewal: Auto renewal of such deposits is allowed, but not under tax saving deposits scheme. The deposit will be renewed as a regular term deposit for a period of 1 year.
Tax Saving FD Benefits
- Tax savings: The principal amount invested as a tax saving FD is allowed as a deduction to the first holder of the FD under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is Rs. 1,50,000.
- No TDS if Form 15H/15G submitted: This FD is subject to TDS rules and regulations. The interest earned on this deposit is taxable. However, if your income is not liable to tax, you can submit a Form 15H/15G and the bank won’t deduct TDS on your interest.
- Beneficial rate to senior citizen: Senior citizens can get a better rate of interest on such deposits. Bank of Baroda pays 0.5% over and above the tax saving FD rates to senior citizens. This is available for deposits below Rs. 1 crore.
- Nomination facility available: It is possible to set up nomination for the tax saving FD.
- Branch transfer: The tax saving FD can be transferred from one branch to another branch at the request of the customer. This can be done by submitting a written request to the branch where the customer has the tax saving FD.
- Minor accounts for individuals: It is possible to open a tax saving fixed deposit for minors as well. These tax saving deposits can serve as important means of financial planning for them.
Facts to Remember while Investing in a Tax-Saving FD
Following are some of the facts one must remember while investing in a tax-saving FD:
- The tenure of a tax-saving FD is five years
- Loans against tax-saving FDs and premature withdrawals are not allowed in the case of tax-saving FDs.
- It can be opened only in a bank
- The minimum deposit amount of a tax-saving FD differs from bank to bank
- One can invest up to 1.5 lakhs in a tax-saving FD in a financial year
Bank of Baroda offers tax saving fixed deposits online and offline through their branches. Opening these is convenient and easy and can be done even in a matter of minutes.
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Fixed Deposit vs Recurring Deposit: Which is the better option?
The process of wealth creation requires discipline. Money must be put away systematically, over a period for wealth to grow. Whether you choose to invest in the stock market, commodities market, mutual funds or even opt for conservative methods of savings such as fixed deposits and recurring deposits; each way of savings comes with its own set of features and benefits. Most people begin with small monthly savings in the form of a recurring deposit, which they convert into a fixed deposit upon maturity. But this is just one way to go about it. In this article, we shall highlight the key differences between fixed deposit and recurring deposits. However, to do so, we need to understand what a fixed and a recurring deposit actually is.
TDS on Fixed Deposit Interest
When one receives a payment, the person making the payment must deduct tax before paying. The tax thus deducted is called tax deducted at source (TDS), which the payee has to pay to the central government.