Fixed Deposits- Tax Saving FD for Section 80C Deductions

Based on present Income Tax regulations, under Section 80C of the Income Tax Act, you are eligible for getting deductions on your investments up to Rs. 1.5 lakh for a particular financial year for tax-saver FDs or Fixed Deposits. The amount that you have invested will be deducted from your gross income for computing net taxable income in this regard. 

There is a certain eligibility criterion for making an FD investment. The following categories of citizens can apply: 

• Resident Indians
• Joint account by two or more people 
• Those who are blind, illiterate, minors and persons with disabilities 
• NRIs (non-resident Indians)
• Societies, clubs, trusts, associations 
• Sole proprietorship entities
• Companies
• Educational and religious organizations 
• Partnership firms 

The documents that are needed to include are:

• ID Proof- PAN Card, Passport, Voter ID, Aadhar Card or Driving License
• Address Proof- Passport, Bank statement with cheque or Aadhar Card
• Date of Birth Proof- PAN Card, Aadhar Card, Voter ID or Service Discharge Certificate 

Some limitations of Fixed Deposits

Even though senior citizen FD rates are comparatively higher than regular rates of interest offered on Fixed Deposits, before investing in a tax-saver option, keep these limitations in mind. 

• Fixed returns- Although your FD returns will never go down, there will be a specific percentage that is guaranteed and will stay fixed. There will be no chance of earning higher returns periodically. 
• Lock-in periods- FDs will have specific lock-in periods chosen by you and 5 years mostly in case of tax-saver FDs. You cannot liquidate or withdraw your investment during this time. This can only be done by paying hefty penalties. 
• Lower tax benefits- 5-year tax-saver FDs are usually chosen for saving taxes but general returns from FDs are taxed under the Income Tax Act. 

Understanding FD income tax exemption

Fixed Deposit exemption from income tax basically indicates that the individual is choosing a tax-saver deposit which is excused from tax payments under Section 80C of the Income Tax Act of 1961. However, the following guidelines have to be adhered to for being eligible for this exemption: 

• Minimum 5 years for deposit maturity and it can go up to 10 years, depending upon the financial institution. 
• The minimum amount invested should be Rs. 100 and multiples subsequently of the same. 
• The maximum amount for tax exemption can be Rs. 1.5 lakh annually. 
• The exemption will only be available for individual depositors and HUFs (Hindu Undivided Families). 
• There will be no loan facilities available for these particular fixed deposits. 

While you can open a tax-saver FD in your own name or with a joint name, the tax exemption will only be available for one of the FD holders if there is a joint account. 

Some things to bear in mind while investing 

If you are investing in a tax-saver FD, here are some aspects that you should carefully keep in mind: 

• Only HUFs and individuals will have eligibility for tax-saver FDs. 
• FD should be for a minimum amount depending upon the bank although the maximum exemption will not cross Rs. 1.5 lakh in a financial year under Section 80C. 
• Premature withdrawals of FDs are not allowed. 
• Tax-saver deposits may be opened solely through private or public sector banking institutions. 
• Interest earned on deposit will be taxable in case it surpasses Rs. 40,000 in a particular financial year. 
• These deposits will come with a lock-in period of 5 years at least. 
• Loans will not be allowed on these types of Fixed Deposits. 
• You cannot invest in these FDs via rural banks or co-operative banking institutions. 
• Investment in Post Office Time Deposit for a period of 5 years will also qualify for deductions under Section 80C of the Income Tax Act of 1961. 
• Post Office FDs may be transferred to another post office from the current post office where they are held. 
• You can hold tax-saver FDs in single or joint modes for holding. However, the tax benefit will only be given to the first holder if you have set up a joint FD account. 
• The interest that you earn will be taxable on the basis of your applicable tax slab and hence, TDS will apply on the same. Interest on deposits will be payable on the monthly, quarterly or annual basis and may be reinvested as well. You can avoid TDS deductions on the interest that you earn through the submission of Form 15G or Form 15H which applies for senior citizens to your banking institution. Senior citizens may also get deductions of Rs. 50,000 on the interest that they earn from their deposits based on Section 80TTB. 
• Nomination facilities are also available for tax-saver FDs. 
• Most banks will be providing slightly increased rates of interest on fixed deposits (FDs) for senior citizens. Non-senior citizens have comparatively lower interest rates on their FDs. This interest rate based differential will be there for tax-saver FDs as well. 5-year post office FD will not have any differential interest rates for non-senior citizens and senior citizens so keep that aspect in mind. 

Hence, whenever you are opting for a tax-saver FD, make sure that you absorb all the above-mentioned information. These FDs come with stringent lock-in periods and no withdrawals or loan facilities will be possible. So you should be prepared to stay patient and invested for this duration in order to truly reap tax benefits. Also, Section 80C usually covers several other common investment types including PPF and others. Hence, check as to the quantum of investment you require for a tax-saver FD in order to fully tap the benefits under this section.