With the end of the financial year looming ahead, it is time to assess your tax liability, and consider tax-saving investment options to reduce your tax liability to the maximum extent possible. While tax planning should not be a last-minute exercise, minimizing tax payable on unexpected incomes or profits can be easily done before the year end through last minute investment options like tax saving term deposits.
Tax Saving Combined with Interest Income
Like FDs, tax saving term deposits offer attractive interest returns. However, unlike conventional FDs, investments in tax saving deposits are deductible u/s 80C making it a suitable option for those who want to top up their 80C investments to save on tax.
Features of Tax-Friendly Fixed Deposits
Term Tax-saving deposits have a minimum term of five years. It is recommended not to withdraw this money before the expiry of the minimum lock-in period. In case one makes withdrawal before the expiry, then the deductions claimed in the previous years will lapse, resulting in extra payable tax in the year one attempts premature withdrawal. These FDs have a maximum term of ten years.
A PPF investment is locked for a period of 15 years. Conventional insurance policies are long-term investments while ULIPs too require you to stay invested for many years at a stretch to earn good returns on your investment. As compared to these options, these FDs offer assured returns with a comparatively smaller lock-in period.
These deposits can be setup with a minimum investment of Rs. 100 while the maximum limit is around Rs. 1 lac to Rs. 1.5 lacs. Since 80C deductions cannot exceed Rs. 1.5 lacs, there is no point investing higher amounts and keeping your funds locked without enjoying any additional benefits.
Interest rates for these deposits are the same as the rates for conventional FDs with higher rates for senior citizens. It is important to note that only the principal invested can be claimed as a deduction. Interest is not tax-deductible. The interest income will be included in your gross income, and taxes will be charged at the applicable slab. Further, those who opt for joint deposits should keep in mind that the 80C deductions is available to the primary holder of the deposit only.
Tax Saving FDs vs. Conventional FDs
The following facilities, normally offered with conventional FDs, are not available for tax-saving deposits:
- No overdraft facility
- No loan against FDs facility
- No sweep-in facility
Despite these facilities not being available, the fact that this investment offers the security of a fixed deposit, a shorter lock-in period, and tax savings at par with long investments makes it an option no sensible tax payer can afford to ignore.
Why risk an unsuitable insurance policy or losses from random equity investments at the last minute? Instead, rely on Tax Saving Term Deposits to reduce your taxes without any long-term complications or issues. With such deposits at your disposal, planning for tax liabilities that crop up at the last minute will be a simple and stress-free experience.
Rachita Kotian is an independent blogger and writing has been her passion for a long time. A literature major, she loves exploring the world of health, lifestyle, travel and finance. When she’s not writing, she’s most likely listening to music, cooking, surfing the web, or catching up on the latest flick.