Need help with how to save money with tax savings? Then, Tax-Saving Fixed Deposit (FD) is a smart financial move that offers an excellent way to reduce tax obligations and achieve financial freedom. These FDs offer unique features that make them an attractive option for saving taxes, but lock-in period and premature withdrawal rules affect their accessibility.
Let us learn more about Tax-saving fixed deposit and the rules relating to the lock-in period and premature withdrawal in accordance with the latest Reserve Bank of India (RBI) guidelines.
UNDERSTANDING Tax-saving fixed deposit
Tax-Saving FD is a type of fixed deposit offered by banks and financial institutions in India. It helps taxpayers save on income tax while encouraging them to invest and grow their savings. You can avail of tax deductions of up to Rs 1.5 lakh from the taxable income under Section 80C of the Income Tax Act. Tax-saving fixed deposit are popular among individuals who want to save and invest money and reduce their tax liabilities.
The following are the benefits of investing in Tax-Saving Fixed Deposit:
- Boost Your Earnings: This deposit type offers attractive interest rates to help you grow your savings faster than a savings account.
- Tax Savings: This empowers you to avail of tax deductions provided under Section 80C of the Income Tax Act, reducing your taxable income by up to Rs 1.5 lakhs. Investing in these FDs enables you to save more on taxes.
- Stability and Security: FDs offer assured returns on investment and are low-risk compared to other investment options, providing flexibility and safety.
- Flexible Payout Options: You can opt for interest payouts on a quarterly, monthly or annual basis.
INTEREST RATES OF TAX-SAVING FIXED DEPOSIT AS PER THE LATEST RBI GUIDELINES
As per the latest RBI Guidelines, the interest rates on Tax-saving fixed deposit are similar to regular FDs (ranging from 6% to 8%), but it is essential to consider the following key components and compare different interest rates offered by different banks and financial institutions before making an informed decision:
- Varied Bank Rates: Different banks offer varying interest rates for Tax-saving fixed deposit, which are subject to market performance and may change over time.
- Additional Benefit for Senior Citizens: This deposit offers senior citizens an extra 0.50% interest rate on this FD scheme to reward them for their investment and encourage them to maximise their savings.
- Flexibility in Rates: This type of deposit allows you to take advantage of potential higher returns in a changing economic environment.
LOCK-IN PERIOD AND PREMATURE WITHDRAWAL RULES AS PER THE LATEST RBI GUIDELINES
While investing in Tax-saving fixed deposit, you should consider the following premature withdrawal rules to make informed decisions to maximise your tax-saving benefits:
Tax-saving fixed deposit come with a lock-in period of 5 years, and you cannot withdraw your funds prematurely during this period as per the latest RBI guidelines. It means the minimum tenure of these FDs is five years.
Tax Saving Benefits:
Investing in these FDs allows you to claim deductions under Section 80C of the Income Tax Act, reducing your taxable income by up to Rs 1.5 lakh.
Exceptions to Premature Withdrawal:
This type of deposit permits premature withdrawals during the lock-in period only in the case of the depositor’s demise. Banks may permit the nominee/legal heir to close the Tax-saving fixed deposit prematurely without penalties.
This type of deposit comes with rigid rules and conditions, so you need to research and compare the interest rates on these FDs offered by the different banks before making any decision.
Fixed Deposit become an excellent opportunity for taxpayers to invest money and save on income tax while ensuring the safety and stability of investments. Banks or financial institutions offer these FDs, but the interest rates may vary. Look for a bank offering competitive interest rates to maximise your returns on the investment.