Tax Saving in FD – Features, Interest Rates & Calculation

Fixed deposits (FD) are a popular investment choice, primarily because of their steady returns and minimal risk. Additionally, they also function as a tax-saving instrument, providing benefits to individuals under Section 80C of the Income Tax Act, 1961.

Features of Tax Saving FD

Tax Saving FD comes with a lock-in period of five years from the date of account opening. This feature dissuades individuals from making premature withdrawals, ensuring they maintain their deposits for the minimum required period to avail tax benefits. Investors can invest a minimum of Rs.100 and a maximum of Rs.1.5 lakh in a financial year. The interest earned on such FDs is taxable, and investors should plan according to the tax bracket they fall under.

Interest Rates of Tax Saving FD

Fixed deposits are available in two forms: cumulative and non-cumulative. The interest rates of a cumulative fixed deposit are compounded annually and paid at maturity. On the other hand, non-cumulative fixed deposits offer the option of receiving interest rates monthly, quarterly, half-yearly, or annually. The interest rates of non-cumulative fixed deposits are generally higher compared to cumulative fixed deposits. Currently, tax-saving FDs with a tenure of five years have an interest rate ranging from 5.5% to 6.5%.

Calculation of Tax Saving FD

Investors can calculate the interest earned on their tax-saving FDs using a fixed deposit calculator. An Indian taxpayer and investor can use online calculators for Fixed Deposit Interest to determine their returns on their investments in just a few clicks. To determine the returns on an FD, investors need to know the investment amount, tenure, and the interest rate.

For instance, assuming current interest rates of 6%, and an investor wants to invest Rs.1.5 lakh for five years, the calculation would be as follows:

• Total investment amount: Rs.1,50,000
• Investment tenure: 5 years
• Interest rate: 6%
• Interest earned: Rs.57,435
• Maturity Value: Rs.2,07,435

In this example, the investor earns Rs.57,435 in interest, and the total maturity value is Rs.2,07,435. Additionally, as this investment is a tax-saving FD and falls under the section 80C tax bracket. The individual can claim an income-tax deduction up to Rs.1.5 lakhs on their entire investment amount.

Pros and Cons

Investing in tax-saving FDs has its advantages and disadvantages. One of the most significant pros of tax-saving FDs is the guaranteed returns, negating the risk an investor will take while investing in the stock market. Furthermore, as an investment with an established institution, tax-saving FDs also have a lower liquidity risk. It also serves as a useful instrument for those with short-term savings goals. However, the biggest con of tax-saving FDs is the lower interest rates compared to other investment instruments such as mutual funds and stock markets. Additionally, because the lock-in period is five years, investors are required to maintain their deposits for a prolonged period, taking a significant amount of time to withdraw their funds.

Conclusion

Tax-saving FDs provide a safe and effective investment opportunity for individuals looking to utilize their Section 80C benefits. Before proceeding with investing in a tax-saving FD, an investor should perform due diligence and research the Bank or NBFC providing the investment. It is also crucial that investors weigh out the pros and cons of FDs in general, comparing them with other forms of investment to better understand the returns they can expect. Furthermore, using an FD calculator can provide guidance on fixed deposit interest and the desired maturity value. Above all, investors should consider their risk appetite and financial goals when investing in any financial market.

Disclaimer:

The article above aims to shed light on investors seeking to invest in tax-saving FDs. However, it is essential to note that investing in the Indian financial market involves its share of risks and benefits. It is crucial that investors gauge all the pros and cons of investing and make a prudent decision. Additionally, the calculations mentioned in this article are hypothetical and subject to change based on market conditions. Readers are advised to consult with a financial expert before proceeding with any form of investment.

Summary:

Tax Saving FDs are aimed at investors looking to save tax, offering various features and interest rates. With a five-year lock-in period, investors can earn guaranteed returns and claim an income tax deduction up to Rs.1.5 lakh on their entire investment amount. Using an FD calculator, investors can determine their gains and make a prudent decision before investing. However, tax-saving FDs have their share of pros and cons, making it critical for investors to perform due diligence before investing. Investors are advised to consider their financial goals and consult with a financial expert before proceeding with an investment.