This instrument is a fixed deposit which allows tax deduction under Section 80C of the Income Tax Act. Such fixed deposits have guaranteed returns and fall under the low risk category, relative to equities. This feature is exactly what makes them one of the most popular tax saving instruments among taxpayers.
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Who can invest in these?
According to current income tax laws, only individuals and Hindu Undivided Families (HUFs) can invest in tax-saving FDs. You can open a tax-saving FD account either with a bank you already have a savings account with or with another bank, provided the bank allows you to do so without opening a savings account.
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How are they taxed?
An investor can claim deduction of up to Rs 1.5 lakh per financial year by investing in these FDs. However, the interest earned on these fixed deposits is taxable as per tax bracket of the investor. Thus, such interest will be added to your income and taxed at the income tax rates applicable to your income slab.
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When will TDS be deducted? How?
If interest payments on FDs with a single bank exceed Rs 10,000 in a financial year, then TDS will be deducted by the bank. To avoid TDS, one can submit Form 15G or Form 15H, as applicable. According to the newly included section 80TTB, senior individuals can claim a deduction of Rs 50,000 on interest received on deposits. Senior citizens are also usually offered higher interest rate on tax-saving FDs.
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Tenure of FD
This type of FD has a lock-in period of 5 years and can be liquidated only after that. According to the Bank Term Deposit Scheme, 2006, you cannot break these FDs before the expiry of five years from the date of deposit. Unlike the normal FD which can be used as collateral to obtain a loan, tax-saving FD cannot be used as collateral or be pledged to obtain loans.
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How is interest paid?
The interest rate offered on such FDs varies across banks. You can choose from cumulative interest or non-cumulative options of tax-saving FDs which are normally offered by most banks.
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Type of holding, nomination option
Tax-saving FD can be placed singly or jointly. However, in case mode of holding is joint, then deduction under section 80C is available only to first holder as mentioned on the FD receipt. Nomination facility is also available in such deposits.
