A Comprehensive Guide on Tax-Saving FDs
Pune, 28th March 2025: Tax saving is sometimes a hectic process for most people, but it does not have to be. Tax-saving FD is a great investment option for those who want to minimise their taxable income and gain assured returns.
Knowing how it works and what it offers can assist you in making the right choice. This comprehensive guide will help you understand the basics of Tax-saving FDs.
What is a Tax-saving FD?
A Tax-saving FD is a Fixed Deposit on which you can claim a deduction under Section 80C. You can invest a maximum of up to ₹1.5 lakh in a financial year and get tax relief. But there is a compulsory lock-in period of five years, so you cannot withdraw money before maturity.
Interest earned on Tax-saving FDs is tax-deductible according to your income tax slab. Even though your investment value qualifies for deductions, the interest income will be added to your taxable earnings.
Advantages of investing in a Tax-saving FD
- Tax deduction: You are eligible for a deduction of up to ₹1.5 lakh as provided under Section 80C, lowering your taxable income.
- Guaranteed returns: As compared to market-linked instruments, an FD provides guaranteed returns, thus ensuring a safe investment.
- Flexible interest payout: You have the option of a reinvestment plan or getting periodic payouts (monthly or quarterly) according to your financial requirements.
- Risk is Low: Since FDs are not linked with the stock market, they are appropriate for risk-averse investors looking for stable returns.
How to use an FD interest rates calculator?
A Fixed Deposit calculator assists you in determining the maturity value for your deposit as per the current rate of interest for a specific tenure. This is an easy to use calculator which provides almost accurate results while calculating the maturity value of your Fixed Deposit.
Steps of using the FD interest rates calculator
- Input the bank’s interest rate.
- Then select the tenure.
- Next, input the interest rate given by the bank.
- Select the interest payment option (cumulative or periodic payments).
- The calculator will show the maturity amount and the total interest accrued.
Using an FD interest rates calculator will guarantee that you get a very clear understanding of your probable return before investing.
Things to keep in mind prior to investing in a Tax-saving FD
- Lock-in period: Your funds will be stuck for five years, so make sure that you don’t require these funds for near-term expenses.
- Interest rate fluctuations: Various banks provide varying interest rates on Tax-saving FDs. Compare interest rates prior to investing to get the best returns.
- Tax implications: Although your principal is tax-deductible, the interest you earn will be taxable. Keep an eye on your tax bracket while investing.
- Nomination facility: Make sure you nominate a beneficiary to simplify the process of making claims in the event of unexpected situations.
Comparing Tax-saving FD with other tax-saving options
Among the safest tax-saving investment options, a Tax-saving FD carries a 5-year lock-in, gives tax-savings of up to ₹1.5 lakh under section 80C and guarantees fixed returns. On the other hand, the public provident fund (PPF) comes with a 15-year lock-in and the same tax advantage, but with variable, yearly compounded returns. The NSC, similar to a Tax-saving FD, also enjoys a 5-year lock-in, fixed returns, and equal tax benefits.
In short, Tax-saving FDs are excellent to save tax and earn very good returns on savings. It is very important for such investors to be aware of the tax implications on FD interest to manage their funds wisely.
Conclusion
Use an FD interest rate calculator before investing and know your prospective returns and scheme comparisons to decide wisely. Keep in mind your investment horizon and tax liabilities to find out if Tax-saving FD is included in your investment plans.
