For long, bank fixed deposits have been among the most preferred options among investors to park money for earning assured returns. Though interest rates on these deposits have come down, they continue to find favour among conservative investors who want their investments to be latent to volatility.
A tax-saving fixed deposit is a variant of a regular deposit, investing in which makes you eligible to claim deduction on your investment under section 80C of the Income Tax Act, 1961. So, what are the other features of this type of fixed deposit? Let’s find out.
A tax-saving fixed deposit offers capital protection against market volatility. In other words, the principal amount doesn’t get eroded even if market tanks. Also, under the Deposit Insurance and Credit Guarantee Scheme, the capital is protected up to ? 5 lakhs.
However, note that while the principal is shielded against market volatility, it’s not inflation-protected. In other words, if the rate of interest is lower than the inflation rate, then your deposit earns no real returns. But, if it’s higher than the inflation rate, it does generate a positive return. The interest rate is fixed throughout the deposit’s tenure.
This is one aspect where a tax-saving fixed deposit is different from a regular deposit. While lock-in varies in the case of a regular deposit that can even be liquidated before its term, the case is quite different for a tax-saving deposit.
A tax-saving deposit has a lock-in of 5 years and you can’t withdraw funds prematurely. In other words, you can’t liquidate a tax-saving fixed deposit before the lock-in period. Neither can you use it as collateral for a loan.
While investment in a tax-saving fixed deposit is eligible for exemption under section 80C of the Income Tax Act, 1961, interest earned from this deposit is not tax-free. The interest earned, considered as income from other sources, is added to your income and taxed as per the income tax rates.
Opening a tax-saving fixed deposit is easy. You can open it with the same bank account with which you hold an account. Just issue a cheque to start your deposit.
On most occasions, you will get the deposit certificate within the same day, mentioning your deposit's details, including the principal amount, rate of interest, maturity date, and the final amount. You can also open a tax-saving fixed deposit in a few clicks with the help of internet banking.
Note that though deposit interest rates vary across banks, in case of a fixed deposit (regular or tax-saving), once the rates are locked, it remains constant throughout the tenure. The minimum investment amount for a tax-saving FD is ? 1,000.
To open a tax-saving fixed deposit, you need to be an Indian citizen and over 18 years of age. If you are a minor, your natural guardians will operate the account on your behalf.
Once the deposit term ends, the final amount is credited to your account.
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