Saving your money is as important as earning it. And to save your money, the  way is to invest the surplus fund in an investment instrument. After all, there is no point in keeping your money idle in your savings bank account and earning a mere 3.5% interest on it. By investing your money in an appropriate investment instrument, you can earn good returns and grow your wealth considerably over time.

 

Depending on your risk appetite and investment horizon, there are several investment avenues where you can park your money. For example, if you can tolerate a bit of risk, you can invest your money in market-linked instruments, such as mutual funds or the stocks of companies.

 

On the other hand, if you prefer the safety of your wealth, you should invest in fixed-income instruments, such as a Fixed Deposit (FDs), National Savings Certificate (NSCs), and the Public Provident Fund (PPF).

 

 

What is a Fixed Deposit?

 

A Fixed Deposit is probably the most common and the most popular fixed-income investment instrument. It is issued by banks as well as Non-Banking Financial Corporations (NBFCs) to help their customers save money and earn a sizeable amount of interest on it.

 

A Fixed Deposit is also known as a Term Deposit because it allows an investor to invest their money for a fixed term and earn a pre-determined interest on it. The returns on a Fixed Deposit are always guaranteed¹ irrespective of how the market performs during its tenure.

 

You can choose to make an investment in a Fixed Deposit for a minimum tenure of 7 days to a maximum of 10 to 15 years. After the end of your FD tenure, you will receive your maturity amount, which will be the lump sum invested by you, plus the interest you earn on it during your FD term.

 

For example, if you invest ₹1 Lakh in a Fixed Deposit of 36 months offering 7.40% interest, you will receive ₹1,23,883 (₹1 Lakh principal plus ₹23,883 interest) upon maturity.

 

 

What is a Tax*-Saving Fixed Deposit?

 

A Fixed Deposit can also double up as a tax*-saving instrument by allowing you to avail of tax* exemptions u/s 80C of the Indian Income Tax* Act, 1961. However, not all fixed deposits offer tax* benefits. You can claim tax* deductions if you’ve invested your money in a special type of fixed deposit known as a tax-saving fixed deposit.

 

Features of a Tax*-Saving Fixed Deposit

 

Let’s look at the main tax-saving FD features that make it different from a regular fixed deposit:

 

• FD Tax* deduction of up to ₹1.5 Lakh
  
  As we have mentioned before, the primary advantage of investing in a tax-saving FD is that it allows you to avail of tax* deduction u/s 80C of the Income Tax* Act 1961. The maximum deduction that you can avail of in a given financial year is ₹1.5 Lakh.

 

• It comes with a lock-in period
  
  Another notable feature of a tax-saving fixed deposit is that it comes with a lock-in period of five years. In some cases, the lock-in period can go up to 10 years. As an investor, you are not allowed to withdraw or redeem your fixed deposit investment during this lock-in period.
  

 

• The interest on tax-saving fixed deposit is taxable
  
  You can claim the entire amount that you’ve invested in a tax-saving FD as tax* deductions from your annual taxable income. However, the interest earned on a tax*-saving FD is taxable as per the existing income tax* laws. The issuer bank of NBFC deducts the TDS before providing the interest benefit.

 

• No auto-renewal option and no pre-mature withdrawals
  
  As mentioned above, pre-mature withdrawals, OD (overdraft), or loans against FD facilities are available in the case of a tax-saving fixed deposit. Additionally, a tax*-saving FD doesn’t offer an auto-renewal facility like a regular fixed deposit.
  

 

• Flexible interest pay-outs
  
  With a tax-saving fixed deposit, you can choose to receive your interest pay-outs according to your convenience. For example, you can choose to receive quarterly or monthly interest payouts or decide to reinvest it in your principal amount.
  

 

• The minimum amount starts from ₹1,000
  
  The minimum amount that you can invest in a tax-saving FD in India in a given financial year is ₹1,000. On the other hand, the maximum amount that you can invest in this instrument in a year is ₹1.5 Lakh.
  

 

• Interest rates on tax*-saving FD
  
  The interest rates on tax-saving fixed deposits differ from issuer to issuer. It also varies depending on the type of investor, such as a senior citizen, woman investor, HUF, etc. You can invest in a tax-saving FD in a single or joint mode. In the case of a joint FD, tax* advantages are available only to the primary account holder.
  

 

 

Advantages of a Tax-Saving FD

 

Now that you know what is a tax*-saving fixed deposit and its salient features let’s discuss the benefits of investing your money in a tax-saving FD. The primary tax*-saving FD benefit is that it allows you to claim a tax* deduction of up to ₹1.5 Lakh in a given financial year. This way, you can reduce your overall income tax* outgo and save your money even more.

 

Some other tax-saving FD benefits include:

 

• You can make lump sum deposits for your future
• Your investments are secured, and returns are guaranteed¹
• You have the flexibility to choose the frequency of your interest pay-outs
• The lock-in period is lower as compared to most fixed-income investment instruments

 

 

To conclude

 

Investing in a tax-saving fixed deposit can serve the dual purpose of investment and tax*-saving. However, it comes with a lock-in period and hence, doesn’t offer a premature withdrawal facility.

 

L&C/Advt/2022/Jul/1731