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Should you invest in Tax saving fixed deposit?

Tax saving fixed deposit carries low risk and has the lowest lock in period.

Are you googling how to save tax? Fixed deposits is a popular tax saving investment option. Tax saving fixed deposit is a category of FD that helps tax payers to get tax deduction under section 80C of the Indian Income Tax Act, 1961. You can claim a tax deduction of up to Rs. 1.5 lakh per financial year by investing in these tax saving deposits. The money invested in tax saving FDs is safe and you can redeem with interest after maturity.

What makes the tax saving fixed deposit different from the other tax saving investments is its low-risk and lock-in period. Tax saving FD carries less risk than other equity-related tax saving investment options such as equity linked saving scheme (ELSS) as tax saving fixed deposit does not carry market risk and the returns are fixed for the tenure. The average interest rate offered by the tax saving FD is around 8.5%. The interest rate vary from bank to bank. Tax saving FD with a lock-in period of five years has the lowest lock-in period among the debt instruments. Other popular debt tax saving investment options such as public provident fund(PPF) come with a lock-in period of 15 years.

Other advantage of investing in tax saving fixed deposit is its liquidity. Although it comes with a lock-in period of five years, investors can opt for periodic interest payouts. You can choose between quarterly interest payout and monthly interest payout. Hence, tax saving FD is comparatively liquid than other tax saving investments such as National Saving Scheme(NSC) and PPF that does not offer the benefit of liquidity during the lock-in period.  However, subscribers can partially withdraw money on the seventh financial year but it is also restricted to just one withdrawal in one financial year.

Tax saving through tax saving FD is also very light on pocket. You can invest in tax saving deposits by investing Rs. 100 and a maximum of Rs.1.5 lakh.

However, tax saving deposit is not without its drawbacks. One of the major drawback is the tax on returns. TDS on the interest on the tax saving FD is applicable. Other tax saving investment like PPF are not taxed while returns from National Pension System(NPS) and ELSS are partially taxed. Other limitation of tax saving deposit is the one time deposit. While ELSS and other tax saving option provides you the flexibility of regular and periodic investment, it is not so in the case in tax saving FD.

By now, you must have 360o view of tax saving deposit. So, if you are looking for a safe tax saving investment option, you can invest in tax saving deposit.

 

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