How to Leverage Fixed Deposits for Optimal Tax Benefits?

How to Leverage Fixed Deposits for Optimal Tax Benefits?

FPJ Web DeskUpdated: Wednesday, February 21, 2024, 02:18 PM IST
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How to Leverage Fixed Deposits for Optimal Tax Benefits? |

Fixed Deposits or FDs have always been a popular way to invest money for high and long-term returns. FDs are generally offered by many major banks and other financial institutions with interest rates ranging from one institution to another. These are a steadfast investment option often chosen for their assured returns and reliability. Yet, amidst the allure of guaranteed earnings, the tax implications may remain overlooked. The interest accrued from FDs is deemed part of your annual income, thereby inviting taxation. However, with certain strategies, you can maximise your returns and minimise your tax liabilities. Here's a comprehensive guide on how to leverage FDs for maximum tax benefits.

What is a Fixed Deposit?

A Fixed Deposit (FD) is a simple savings option offered by banks and financial institutions. You deposit a certain amount of money for a fixed period; in return, the bank pays you interest. It's like giving the bank a loan, and they pay you back with interest. 

FDs are popular because they offer an assured return on your money and are considered safe. You can choose how long you want to keep your money locked in, and the longer you leave it, the more interest you earn.

What is a Tax-Saving Fixed Deposit?

A tax-saving FD is a great tool for tax planning, offering a gateway to significant tax rebates under Section 80C of the Income Tax Act of 1961. By investing in such FDs, individuals and Hindu Undivided Families (HUFs) can unlock tax exemptions of up to Rs 1.5 lakh per year, provided the deposit is maintained for a minimum tenure of 5 years.

Key Considerations for Investing in Tax-Saving Fixed Deposits

Tax-saving FDs are exclusively available to individuals and HUFs: These FDs offer tax benefits under Section 80C of the Income Tax Act, making them suitable for tax planning.

Minimum investment thresholds vary across banks: Banks set minimum deposit amounts required to open tax-saving FD accounts, which may differ.

Joint holding is permissible, but tax benefits apply solely to the primary account holder: While multiple individuals can jointly hold a tax-saving FD, only the primary holder is eligible for tax deductions.

Tax-saving FDs entail a mandatory lock-in period of five years: Funds deposited in tax-saving FDs are locked in for a minimum of five years, restricting premature withdrawals.

Premature withdrawals and loans against these FDs are not permitted, necessitating careful evaluation of liquidity requirements: Tax-saving FDs do not allow early withdrawals or loans, requiring depositors to assess their liquidity needs before investing.

Interest can be paid out periodically or reinvested: Investors can receive interest payouts at regular intervals or reinvest them to enhance their returns.

Tax Deducted at Source (TDS) is applicable if the total interest earned surpasses Rs 40,000 in a fiscal year, with senior citizens enjoying a higher threshold of Rs 50,000 under section 80 TTB: TDS is deducted on interest earnings exceeding specified limits, with senior citizens enjoying a higher threshold.

Senior citizens usually receive preferential interest rates: Banks usually offer higher interest rates on tax-saving FDs for senior citizens.

Smart Ways to Minimise TDS On Fixed Deposit Interest Rates

In this section, learn how you can save and minimise TDS on FD interest rates

1. Submit Form 15G/15H:

If your income is below the taxable threshold, you can fill out Form 15G (for non-senior citizens) or Form 15H (for senior citizens) and give it to your bank. It tells the bank not to deduct TDS from your FD interest, helping you keep more money.

2. Split Your FDs:

Instead of putting all your money into one FD, you can divide it among several smaller deposits. This way, you won't exceed the TDS limit on any single deposit, reducing the tax you must pay on your interest earnings.

3. Invest In the Name of Family Members:

You can also open FDs in the names of your family members in lower tax brackets or exempt from TDS. By doing this, you can spread your investments and take advantage of their tax benefits, helping you save money in the long run.

Why Should You Choose a Tax Saver Fixed Deposit?

Tax-Saver FDs emerges as a beneficial tool for tax-conscious investors, offering a wide range of benefits:

1. Easy Online Opening: Tax-saving fixed deposit offers a hassle-free opening process. You can secure your desired amount efficiently with three simple steps, including Aadhaar and PAN verification and a quick video KYC.

2. Flexible Interest Payments: You can easily customise your interest payouts according to your needs, whether you prefer monthly, quarterly, half-yearly, yearly, or maturity payouts, providing financial flexibility.

3. Attractive Interest Rates: With tax-saving FDs, you get access to competitive interest rates with many major banks, ensuring that your investment earns optimal returns while saving on taxes.

4. Market-Independent Returns: Furthermore, you can protect your investment from market fluctuations with tax-saving FDs, ensuring consistent growth and stable returns throughout the tenure.

Conclusion  

Taking advantage of Fixed Deposits for tax optimisation entails smart financial planning and a reasonable selection of investment avenues. With the above mentioned strategies, you can make informed decisions, and secure your financial future and minimise your tax burden effectively. Invest wisely, and embark on a journey towards financial prosperity and peace of mind.

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