What are tax-saving fixed deposits? How to save tax by investing in fixed deposits?

Fixed deposits are a popular investment option, but you can also save taxes with it

How to save income tax by investing in fixed deposits

Fixed deposits (FDs) are a popular way to save for the future. A tax-saving FD account is a type of fixed deposit account with a bank that offers tax savings under Section 80C of the Income Tax Act, 1961. 

The lock-in period for FD tax-saving schemes is five years, during which you cannot withdraw your money. It helps you earn a higher rate of interest; which, although taxable, will help you save tax on the FD investment. You can invest up to Rs 1.5 lakh in a tax-saving fixed deposit. Do ensure that you compare options to get the best tax-saving FD interest rates.

The interest earned on FD falls under the head ‘Income from Other Sources’. Apart from the income tax saving options of Section 80C, you can also avoid TDS on your FD income. This is particularly helpful if you fall below the Income Tax slab, and want to avoid the process of filing returns just for the tax refunds. Here are some steps you can take in this regard.

Submission of Form 15G/15H

In the bank where you have applied for your FD, you need to submit Form 15G mentioning that you have no taxable income. Then the bank will not deduct any TDS on the interest you earn. Senior citizens who wish to avoid TDS need to submit Form 15H.

Related: Best Rates For Bank Fixed Deposits To Invest In 2021

Distribute your Fixed Deposit investment

Distributing your investment in different banks ensures that the interest earned from any of these investments does not exceed the Rs 10,000 limit. This way, you can avoid TDS on the interest earned on your fixed deposits. However, the entire interest income has to be accumulated while calculating the tax thereon. 

Timing the Fixed Deposit

Invest your funds in fixed deposits in such a way that the interest earned in a financial year does not exceed the taxable amount. For instance, if you want to invest in FD for a year, you can invest in (say) a 6-month fixed deposit starting in September. The financial year closes on March 31. Therefore, your interest gets spread over two financial years and the amount of interest will automatically be less in both financial years, thereby avoiding TDS on your FD and splitting the interest income across two financial years.

Splitting the Fixed Deposit

If you are an investor with a HUF identity, you have another option. You can start one fixed deposit under your bank account and another under your HUF account. Choose an FD plan with the best tax-saving FD rates and open one each in your and your HUF’s name.

You can open your FD account online or offline. For the former, visit the bank’s website and follow the required instructions. In case of offline, visit your nearest branch and request an FD application form. In both cases, keep the necessary documents at hand. Tax-saving FDs can be booked with monthly and quarterly payouts as well.

Related: Best rates for corporate fixed deposits to invest in 2021

A tax-saving FD is a popular investment that makes you eligible for tax benefits. You can continue to earn these benefits through reinvestment of the matured FD as well.


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