Fixed Deposit for Tax Saving: Should You Opt For It?

Fixed deposit accounts are one of the most traditional methods of investment. Be it a tax saving FD account or an HRF account, they serve the needs of different individuals

Fixed deposit accounts are a type of investment instrument that is offered by financial institutions. In this type, the investor would fix the lump sum for a period of time. The time when you will get the interest and principal of the fixed amount is the maturity period. 

Table of Contents

• Types
• Tax Savings on FD accounts
• Advantages

Types of FD Accounts

Fixed deposit accounts have different types which are based on the benefits of different accounts, account holders and purpose of the account opening. Following are the types of FD accounts:

1. Regular FD Account

This account is meant for individuals who are less than 60 years of age. The rate of interest for such accounts remain less than the senior citizens’ FD accounts.

2. Senior Citizens FD Account

This is specially meant for people older than 60 years. These accounts get a higher rate of interest than regular FD accounts. Such account holders can avail of the monthly interest payout plan to take care of their everyday expenses.

3. Corporate FD Account

Banks offer different interest rates and deposit tenure. Such organizations can deposit excess funding and profits in these FD accounts until they put the cash in use.

4. Tax Saving FD Account

Individuals utilize these FD under 80C accounts with a minimum lock-in period of five years to save income tax. This acts as a tax free fixed deposit. Such deposits gain tax deduction under section 80C of the Income Tax Act, 1961.

5. NRO FD Account

Such accounts can be opened by Overseas Citizenship of India (OCI), Person of Indian Origin (PIO), and Non-Resident Indian (NRI). Any income that is earned in Indian rupees can only be deposited in NRO FD accounts. 

An NRI can jointly hold this account with an Indian resident who falls in the categories of relatives specified under Section 6 of the Companies Act, 1956.

6. NRE FD Account

Two or more NRIs can open this account. You can convert foreign currencies earned outside India into Indian currency. You can repatriate both principal and interest from this account. There is tax exemption on the interest income from this account under Section 10(4) of the Income Tax Act.

7. FCNR FD Account

NRIs can open this account. You can deposit the money earned outside India. The acceptable currencies include US Dollars, Euro, Pounds Sterling, Japanese Yen, etc. You can retain money in the same currency with better returns.

8. FD Account With Monthly Payout 

These accounts pay interest accumulated on monthly basis. The accrued interest is not added back to the principal, and this interest will not be compounded. You can send the interest component to your savings account monthly.

9. FD Account With Maturity Payout 

The interest gets accrued in this account over the deposit tenure. It gets compounded and you will get principal along with interest components on the maturity.

How To Save Tax on Fixed Deposits?

The fixed deposit account also allows tax savings through tax deduction provision under Section 80C of the Income Tax Act. You would have to invest up to Rs.1.5 lakh in the tax-saver fixed deposit account. This scheme ensures returns as well as capital protection. 

If the total income is below the taxable limit, you can evade tax deduction. You can do so by submitting Forms 15G and 15H to your bank and requesting them not to deduct any TDS.

You should note that the interest income is fully taxable. The tax liability is dependent on the total income for the financial year and your tax slab. The interest income falls under the head ‘Income from Other Sources’. Banks deduct tax at source in case the earned interest exceeds Rs.40,000 in the financial year across all accounts in the bank. Bank will issue a TDS certificate to confirm the deduction details. 

To gain fixed deposit tax benefit, you can do the following:

1. 15G/15H form: Through this form, investors claim that they do not have any taxable income and request the bank not to deduct ant TDS on the earned interest. Senior citizens can submit 15H to avoid TDS.
2. Timing FD: You can go for a fixed deposit based on time up to which your interest does not amount to more than ₹ 10,000.

Advantages of Fixed Deposit Accounts

• The habit of Savings: An FD account can help you in building a saving fund for your future. You will be able to increase this corpus by building more FDs.
• Guaranteed Returns: FD accounts ensure returns on both principal and interest components at the end of deposit tenure.
• Flexibility: You can choose the fixed deposit tenure as per your requirement. This duration can be as short as 7 days and as long as 10 years. More time will lead to more interest.
• No Maintenance: There is no need to maintain or regularly put funds in such accounts. You only need to deposit funds once. Active management is not a necessity in the case of FD accounts.
• Easy Liquidity:  Even if there is a lock-in period, you can still liquidate the investment whenever you want. Here, the conditions are not as stringent as other investment instruments. 
• Safety: Under the Deposit Insurance and Credit Guarantee Corporation (DICGC), account holders will be eligible for a maximum compensation of Rs 5 lakh. 
• Tax Benefit: You can get a tax deduction under Section 80C of up to Rs.1.5 lakh when you make an investment in the tax-saver FD scheme. Do note that it has a minimum lock-in period of five years.

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Fixed deposit is a great investment instrument for those who have less risk tolerance. Those who seek a safe investment option with great returns should opt for this method. Along with a number of benefits, it does offer tax-saving benefits. Overall, it is a flexible and secure investment option with good returns.