Fixed deposits are one of the most preferred choices for investors looking for low-risk investment options. Along with scaling significantly low on risk-factor, fixed deposits also let investors avail deductions under section 80C of the Income Tax Act, 1961.
As per this section, resident individuals or Hindu Undivided Families (HUFs) who have invested in a tax–saving FD, are eligible to claim deduction up to Rs. 1.5 lakh in a financial year. The said deduction of 80C can be claimed in the financial year in which investment is made.
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Tax Saving Fixed Deposit: Deductions under 80C
Section 80C of the Income Tax Act provides tax-payers the facility to lower their taxable income by claiming the deduction while filing the Income Tax Return. Certain payments, contributions and/or investments by the assessee can be deducted from the gross salary so as to lower the tax to be paid in a financial year.
Important Features:
- Investment of up to Rs. 1.5 lakh in a tax saving FD can be claimed as deduction u/s 80C
- FD has to be made for 5 years, minimum
- To avail this deduction, PAN (Permanent Account Number) of the investors must be registered with the bank where they have booked the FD
- Tax saver FD comes with a lock-in period of 5 years, i.e. money cannot be withdrawn before 5 years from the date of booking the FD
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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 someone does not have a valid PAN CARD then they first need to apply for the same to invest in tax-saving fixed deposits.
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How to Claim FD Deduction under Section 80C?
However, tax-saving fixed deposit schemes allow tax benefits, interest earned on such FD is taxed at source (TDS). This means that while the initial deposit amount will be allowed as deduction u/s 80C, interest earned on this investment shall not be tax-free.
Let’s understand this with the help of the following example:
Mr Arya has invested Rs. 5 lakh in SBI tax saving FD for a period of 5 years on 1st January 2020. He is offered an SBI FD rate of 6%. On 1st January 2021, he earns a total interest of Rs. 30,682. He claims Rs. 1.5 lakh out of Rs. 5 lakh as 80C deduction when filing ITR for the year 2020-21. But along with that, the bank also deducts TDS @ 10%. This equals to Rs. 3,068 (approx.). Thus, the net interest income which he receives amounts to Rs. 27,613 (approx.) and not Rs. 30,682.
| Amount Invested | 80C Deduction | Interest Earned in 1 year | TDS on Interest Earned |
| Rs. 5 lakh | Rs. 1.5 lakh | Rs. 30,682 | Rs. 3,068 |
Tax Saving FD: Benefits of Investing
- The amount invested in tax saving fixed deposit is deducted from gross total income to arrive at the taxable income
- Investment in tax-saving fixed deposit is risk-free as they offer guaranteed returns and are completely secure
- The tax-saving fixed deposit offers nomination facility
- Interest payout options on monthly/quarterly/annual basis can be opted to have a regular income
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Other Tax Saving Investment Options
As per the Income Tax Act, other than tax-saving fixed deposits, there are other investment options available too using which one can get tax benefits. Some of these options are:
- Post office fixed deposit – 5 years lock-in period
- Public Provident Fund (PPF) – 15 years lock-in period
- National Savings Certificate (NSC) – 5 years lock-in period
- Equity Linked Savings Scheme (ELSS) – 3 years lock-in period
- National Pension Scheme (NPS) – Till retirement of the depositor