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Friday, November 16, 2012

5 Year Tax Saving Fixed Deposit (FD) under Section 80C

We studied in detail about Bank Fixed Deposits (Bank FDs) and the tax implications arising out of the interest earned through Fixed Deposits in a few of our earlier posts:


There is one very interesting aspect of Fixed Deposits which is worth mentioning as a separate post. So, i thought i would share that with all of you.

As per the Section 80C of the Income Tax Laws of India, we can do investments of up to Rs. 1.5 Lacs (Rs. 150,000 only) which would help us save taxes on an equal proportion of our salary. While there are various commonly known options to invest and save taxes under Section 80C, one of the option which is not very commonly known for Section 80C investments is 5 year Fixed Deposits.

With effect from Assessment Year 2007-08 (Click here to know more about what an Assessment Year is), investment in Fixed Deposits for a fixed period of 5 years with a scheduled bank qualifies for deduction under section 80C.

Following are the key features of this policy:

1. The lock in period for such a "Tax saving Fixed Deposit" is 5 years. You can not break this Fixed Deposit before 5 years tenure is over. This is different from any regular FD which can undergo a premature withdrawal.

2. Interest rates for such a Fixed Deposit are decided by the respective banks, as is done for a regular Fixed Deposit

3. Tax Saving Fixed Deposit is available only through the banks. Company Fixed Deposits are not eligible for tax savings through Section 80C

4. A maximum of Rs. 1.5 Lacs is exempted under Section 80C, even though the amount of such a deposit can be more than Rs. 1.5 Lacs as well.

5. No partial or premature withdrawal is allowed in such a Fixed Deposit. This is much like a Public Provident Fund (PPF) deposit, where the lock-in is permanent till maturity.

6. Sweep-in or overdraft facility in such a Fixed Deposit is not allowed.

7. Only the first account holder, in case of joint accounts, is allowed deduction under section 80C

8. The interest earned out of such a Fixed Deposit is fully taxable on an accrual basis, as is with any other fixed deposits.

To summarize, while Tax Free Fixed Deposits are quick and easy investment options to save taxes on your income as per Section 80C, it does not provide efficient returns since the interest earned is fully taxable.

Cheers

Manoj Arora

10 comments:

  1. You had publishing the good good information about 5 Year Tax Saving Fixed Deposit ! its a saving tax schemes. Thank you so much !

    ReplyDelete
  2. is there a way through which i can exit 5 years tax saving fixed deposit .pls reply a

    ReplyDelete
    Replies
    1. Hi Shairam

      Thanks for your query. Unfortunately, no premature withdrawal is provided in the tax saving term deposit of 5 years. One can only exit from this scheme at the expiry of five years. In fact, for this specific deposit, there is no sweep-in facility i.e. this fixed deposit cannot be linked to a savings account also.
      On the other hand, you can get the term period extended from 5 years to anywhere up to 10 years, if you wish to :)

      Cheers

      Manoj Arora

      Delete
  3. Is there a way through which i can exit a 5 years tax saving fixed deposit.

    ReplyDelete
    Replies
    1. Hi Shairam

      Thanks for your query. Unfortunately, no premature withdrawal is provided in the tax saving term deposit of 5 years. One can only exit from this scheme at the expiry of five years. In fact, for this specific deposit, there is no sweep-in facility i.e. this fixed deposit cannot be linked to a savings account also.
      On the other hand, you can get the term period extended from 5 years to anywhere up to 10 years, if you wish to :)

      Cheers

      Manoj Arora

      Delete
  4. what is the 'scheduled bank' term mentioned over there mean?

    ReplyDelete
    Replies
    1. Scheduled Banks in India are those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934.[1] RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.
      There are public, private and foreign banks which are scheduled. Most of the common banks that you know of are scheduled banks. For a comprehensive list, refer the below links:
      http://en.wikipedia.org/wiki/Scheduled_banks

      Delete

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