Paying taxes on time is the duty of every citizen. It helps the country in several ways, including infrastructure development and subsidies for the weaker sections. However, taxing everyone at the same rate is unfair, as not everyone earns the same amount. Individuals running businesses usually earn more than salaried individuals, so it isn’t right to tax them the same way.
Many solutions have been presented to address this problem, although none has worked as well as tax-saving schemes. Tax saving fixed deposits are one such tax-saving instrument that can help you save tax.
What is tax-saving fixed deposits?
A tax saving fixed deposit works like its traditional counterpart. It has fixed interest rates and tenure, and according to the type of FD you choose, you can receive the interest in your bank account every month or reinvest it in the FD itself.
The significant difference is that a tax-saving fixed deposit comes under Section 80C of the Income Tax Act. It helps you save up to Rs. 1.5 lakhs every year by investing in a tax-saving FD.
Differences between normal FD and tax-saving FD
There are two main differences between a traditional FD and a tax saver FD. The first is that a tax-saving FD has a lock-in period of five years, compared to three or fewer years in a standard FD.
Secondly, in the case of a traditional FD, you have the liberty to break it before maturity for a small fee, but there is no such provision for a tax-saving FD. Liquidity is, therefore, a concern with the latter. Additionally, tax-saving FDs do not have an auto-renewal option. If you wish to renew, you must start another FD.
However, tax-saving FDs offer a few intriguing benefits. Some of them have been covered below.
- Higher returns
Fixed deposits give you much higher returns than a regular savings account. You cannot withdraw your money until the end of your FD tenure. It means the bank knows that you will have the funds deposited until maturity. It enables them to give you much higher returns.
- A safe place to park your money
Fixed deposits are a safe place to park your money. Your money and returns remain unaffected since it does not fluctuate based on existing market conditions. Furthermore, the bank’s interest rate remains fixed and unchanged, making investing planning much easier.
- Easy to understand
FD terms are simple compared to other forms of investment. You need to invest your money until the lock-in period, and you will get your fixed interest until maturity. It is a useful investment instrument for the masses, who might not have ample knowledge about markets.
A tax-saving FD helps you save tax and earn decent returns. You can use tools like an FD calculator online to maximize the benefits and plan your investment better.