Tax Saving FD (Fixed Deposit) is another popular tax saving scheme for risk averse investors. As financial year is coming to an end and its time for income tax investments therefore based on request from my readers i am writing posts related to income tax savings schemes. This article on Tax Saving FD is third in series as i received 3rd highest queries on this particular tax saving scheme.
Prime facie Tax Saving FD looks very lucrative investment option to save Income tax under section 80C but we have to take 360 degree approach. The biggest advantage of Tax Saving FD is its maturity period. Lock-in period of Tax Saving FD with assured return is just 5 years only next to ELSS (3 years). Basic Thumb rule of financial planning is not to lock money for too long until unless there is a compelling reason to do so like in PPF. Secondly currently interest rates are very high for Tax Saving FD therefore it makes sense to invest for 5 years. Maximum investment allowed under Tax Saving FD is Rs 1 Lac for tax benefit under section 80C.
The biggest disadvantage of Tax Saving FD is that interest accrued from Tax Saving FD is taxable in the hand of investor. Another down side is that you need to pay tax on interest every financial year i.e. year in which interest is accrued though you will get the Principal + Interest only at the time of maturity i.e. after 5 years. If you are in highest tax bracket of 30% than Tax Saving FD is not at all tax friendly tax saving scheme. Also please note that interest rates of 5 year Tax Saving FD are not fixed and are decided by the banks from time to time. Premature withdrawal and Loan against Tax Saving FD is not allowed.
I suggest this Tax Saving Scheme only to those investors who are in lowest income tax bracket of 10%.
Query 1: Mr. Amarnath Sharma from Jammu asked me that can he claim deduction of Rs 10,000 as provided under section 80TTA on interest income from Tax Saving FD.
Answer 1: Let me clarify that deduction under section 80TTA is applicable only for cumulative interest earned from savings account or Post office savings scheme. Interest from Bank FD’s including Tax Saving FD, NSC’s & Recurring Deposits are not part of this section & will be taxed separately.
Query 2: Mamta Dave from Nashik asked me that Bank has already deducted 10% TDS on Tax Saving FD, Is she liable to pay more tax on Tax Saving FD as TDS is already deducted
Answer 2: Bank deduct the TDS @ 10% (20% in case PAN is not available with the bank) but your final tax liability depends on your Income Tax slab. Mamta’s Income Tax slab is 30% so i advised her to pay 20% more tax on interest from Tax Saving FD. You may ask for TDS certificate from bank / download from net banking or download form 26AS from the website of Income Tax department which contains all the details of TDS deducted against your PAN during FY to calculate balance tax liability. Check following link for more details
Query 3: Sonia Arora from Mumbai & Rajpal Singh from Lucknow received Income Tax notices as they claimed tax benefit for 5 year Tax Saving FD but Income Tax Department rejected their deduction & sent demand letters with penalty. Both of them approached me with Income Tax notices
Answer 3: I suggested them to check with Bank regarding the same and as i was anticipating correctly both of them opened 5 year normal Bank FD which was not Tax Saving FD. Please note that even a normal 5 year Bank FD can be opened with the bank (Without tax benefits). Sonia opened 5 year FD through Net Banking facility & Rajpal opened through Bank branch. You cannot open Tax Saving FD through Net Banking facility, you need to visit the branch for same. Even at the branch you need to specifically inform the bank executive that you would like to open 5 year Tax Saving FD under section 80C.
Query 4: Lt. Col. Rathore from Pune is a retired Army officer. He would like to invest jointly in Tax Saving FD along with his wife. He asked me, will he get tax benefit if Tax Saving FD is opened in joint name.
Answer 4: Yes, its very much possible to open Tax Saving FD in joint name. The tax benefit is available only to 1st Applicant not to 2nd Applicant. I suggested Mr. Rathore to be the 1st Applicant to avail tax benefit and his wife can be 2nd applicant.
I tried to cover all the points related to Tax Saving FD. You may post your queries, comments, suggestions and feedback in following comments section.
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