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%.
FAQ’s
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
http://contents.tdscpc.gov.in/en/taxpayer-home.html
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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Hi Nitin,
I am a salaried person and my income tax gets deducted from salary as per declarations I make in my payroll site, my annual income fall into 20% tax bracket, I have closed an FD account & have got 20K+ as interest on which bank has already deducted 10% TDS.
Shall I declare the same in my payroll site (form 12c – income from other source)? I have got tax certificate from bank as well
Is it mandatory?
During FY, Cumulative Interest received up to Rs. 10,000/- is Tax free. Any Interest received beyond Rs. 10,000/- will be taxable as per the Income Tax rates applicable. This interest is from all sources i.e. FD, Savings Account, RD, Post Office Savings account etc. In your case, you need to pay 10%. Also check whether your payroll consider Income from other sources over and above 10k exemption limit or gross value & than adjust 10k exemption. Accordingly Tax will be deducted as per your income tax bracket by the company.
Hope Bank has issued Form 16A as you will need these details while filing income tax return for the year. Yes, it is required to declare the interest income.
There is no direct advantage except Tax savings & you might get slightly high interest rate. Different banks offer different interest rate on 5 year Tax saving FD so check before you invest. Also Tax Saving FD has lock in period of 5 years. You need to specifically mention that you would like to open Tax Saving FD. In many cases bank open normal 5 year FD without any tax benefits.
Yes, Bank has issued tax certificate for the same, however I see that they have deducted 2400 from 24K approx, seems they have not exempted 10K as you mentioned. Hope it will be taken care by my employer if I declare it. please suggest
I am not sure about Payroll software & how they calculate…Its better you calculate net liability (After 10k exemption) and pay self assessment tax on your own to avoid any confusion. It can be paid online also.
Hi Nitin,
Anyway the interest on tax saving fd is taxable. So can i add this interest/year to my annual income every year than adding the total interest to my 5th years income ? This way i can divide my tax liability across 5 year , right ?
Also, can i calculate interest/yr manually every year and add that as “other income” or should i have to have some documents from bank stating the income/ yr ?
Interest accrued on tax saver FD is liable to tax under Income Tax Act on the basis of annual accrual or receipt. It depend upon the accounting method followed by you.
You may check the annual interest accrued from bank and add to income from other sources. Interest is taxable only if it exceeds Rs 10000 in a FY.
I have a FD of Rs 49000 for 1 year issued in May 2014. At that time my income was not Txable. In June I got govt job and fell into 10% slab. Now I want to invest this as tax saving FD for 5 years with some more money. How is it possible?
It is not possible to convert this FD into Tax saving FD. You can break this FD and open another 5 year tax saving FD. Also check on applicable penalty for premature withdrawal of FD.
I opened a 5-year tax saver FD with YES Bank. Can I claim the benefit under Section 80C every year on this or that’s just for the first year?
You can claim tax benefit on 5-year tax saver FD only for FY in which you invested i.e. current FY
Hi Nitin,
Two things:
– Can’t I claim tax benefit on 5-year tax saver FD which is on the name on my wife?
– Can I claim tax benefit on 1 year RD?
you cannot claim tax benefit under both the scenarios i.e. tax saver FD in your wife’s name and RD.
Okay. Thanks for your reply. Just to be clear:
What if FD is not tax saver FD? I mean can I claim tax benefits if it is a normal FD on my wife’s name?
Still No? :)
There are no tax benefits on normal FD even if it is long term.
hello sir, I have a 5 year tax saving FD for Rs.1 lac, and 5 year it will get mature Aug -2018, I want to know that the maturity amount would be taxable and should I have to add that maturity amount to my total income of that year (ie 2018)?
Interest is taxable. You have pay tax on accrued interest every FY though you will received principal + interest at the end of 5 years.
Hi Sir, I opened a 5 year tax saving FD for Rs. 20,000 on 04.11.2013 and interest accrued to the deposit amount was INR 721 for 2013-14 & INR 1,777 for 2014-15. But tax deducted in 2014-15 was INR 1,064. The TAX was not deducted at 10% & my PAN details are already available with bank. In this scenario, how much tax should I pay on interest amount ? Please guide me sir,
It require calculation and is part of paid service. You may clarify from bank.
Sir, do we need to do FD every year for a five term period to apply for tax deduction in every financial year or one FD can be used for deduction in successive periods?
Tax deduction on Tax Savings FD is available only for FY in which the amount is invested in Tax Saving FD. Therefore, you need to invest every year in Tax Saving FD to avail tax deductions.
the rule for pay tax on accrued interest for 5 yrs tax savings FD in Bank is new one or it was always there?
It was always there.
I worked in India for a few years and I have tax saver fixed deposit with HDFC bank which will mature in 2018. Now I am a non resident and what to re designate my status as Non resident., The bank is telling that I have to dissolve FD as it cannot be re-designated. When that Fd was opened, the relationship manager knew I may not be a resident of India till maturity. Please, guide me on this.
Seems bank relationship manager mislead you. I concur with bank to dissolve FD and pay tax on deduction claimed u/s80C against tax saver FD.
sir i had to pay 2036 amount in taक्ष् so please guide me how much amount of tax saving FD i have to for 5 years
Taxable Income minus Basic Exemption Limit
Sir, I have invested in FD in 2015 for tax saving purpose for 5 years. Can I break the previous FD(2015) and with the same money can i reinvest in 2016 for tax saving for next 5 years?.
There is a lock in period of 5 years. Therefore, you cannot break the tax saving FD before maturity.
Hi Nitin,
I am planning to invest 70K in tax saving FD where in 5 years duration my interest earned every year will not exceed more than 10K. However, total interest of 5 years will be more than 10K.
a) Will my interest earned will be eligible for tax deduction after end of 5 years/per year?
b) Will the interest earned will be summed up with my salary and then tax will be deducted?
c) If I invest in more than one tax saving FD with different banks, for instance one with Bank A with 70K and Bank B with 50 K. Now if I calculate, individually the interest earned will be less than 10K each year but collectively it will exceed 10K. Will I be eligible for Tax deduction?
Thanks,
Puneet
(a) No. Interest is taxable i.e. it will be added to your income and taxed
(b) Yes
(c) No. It doesn’t make any difference.Interest is taxable
Thanks Sir. Just one doubt, if my interest earned is less than 10 k per year then also it will be taxable?
yes
hi sir, if i invest in tax saver fd for 5 years. can i avail tax benefit for all 5 years through this single FD? or for every year i have invest again in tax saver FD’s like this??
Tax deduction is allowed only once during the FY in which you invested the money. For subsequent years, you should make fresh investment to claim tax deduction.
Dear Nitin , in my case i have already paid 1.5 Lac in PPF in last April 2016 & also opted for an Tax saver FD of 1.5 Lac in Feb 2017 . By looking your above reply i understand that i will not be able to claim the FD rebate . Am i correct in understanding ? Or can i claim the FD in next 80C .
The max limit u/s 80C is 1.5 Lac. Therefore you can claim tax benefit either on PPF investment of Tax saver FD. The tax benefit u/s 80C cannot be carried forward to next FY.
Hi sir, in case of FD ( either or survivor)interest cross the 10000 rs limit, Tax liability is calculated on whom? the first applicant’s or 2nd? Shall I sumbit 2 separate 15g form with PAN details for both ? What’s is income tax rule
If the TDS is deducted by the bank then they will deduct and deposit against the 1st FD folder therefore in this case, total interest income should be declared by first holder of FD. As you have submitted form 15G therefore TDS will not be deducted. In this case, you can split the interest income between first and second holder of FD or first FD holder can declare total interest income.
Hi Nitin, if I invest 1.3 lakh in 5 year tax saving FD at an interest rate of 7.65 %, the interest accrued in one FY equals 9,945. Based on my understanding, there will be no TDS deducted as the interest generated each year is less than 10k but this interest is taxable and tax will be deducted according to the income slab I fall in, so I will have to declare this interest as income from other sources. Please correct me if I am wrong.
If your total interest across all branches of a bank is less than Rs 10,000 then your understanding is correct. You can follow any method to pay tax i.e. either pay every year (on accrual basis) or pay tax on maturity when you will receive interest (on receipt basis).
You can open tax savings FD with any scheduled bank but you need to specify the same at the time of opening.
Hi Nitin, I would Like to know whether some amount can be added later to the principal amount like yearly till 5 years
No. You have to open new tax saving FD.
I need to invest 30000 more this year to complete deduction of Rs.150000 under 80c. My wife is a housewife without any taxable income. Is it possible for me to get the tax benefits (any plan?), if I invest that 30000 on her name?
You can claim tax deduction depending on the financial product. For example, PPF investment in the name of a wife and children is allowed as a deduction.
In case of death of first account holder of tax saving FDR with bank whether prepayment is possible
The nominee can encash before maturity date. While filing the last income tax return of the deceased, the tax benefit availed can be reversed.
Sir i have 10 lakh rupees so i am thinking to deposit them to fixed deposit .
So my question is that will i get tax benefit on 10 lakhs i know intrrst will be taxable.but i am thinking will there be tax on 10 lakh rupees??
There will not be any tax on principal amount i.e. 10L. You can claim tax deduction u/s 80C if you invest in Tax Saving FD with 5 year lock in period.
Respected Sir,I have 10 lakh rupees in my savings account but till now i hav not payed any incometax on it.but now i am thinking to deposit all of them in fixed deposit in others banks.
so will there be any tax on 10 lakh rupees.?
You have not mentioned the source of 10L. If you saved this amount from your salary and paid tax on your salary then there is NO TAX applicable on 10L. Only the interest earned from 10L will be taxable.
Hi Nitin,
I want to get a new tax-saving FD. There are various options like Cumulative FD, traditional FD-Monthly Interest Payout and traditional FD-Quarterly Interest Payout. Is there a difference among them from tax-saving perspective? Please guide.
Thanks
It depends on your preference and requirement. From financial perspective, cumulative FD is better option.
Dear Nitin,
1.I had taken a 5 year tax saving FD in 2010 which matured in 2015. However, as I was out of the country from 2014 on wards, on maturity, the FD has got auto renewed for a period of another 5 years. As i will be staying out of the country, can the bank break the FD and credit the funds to my savings account?
2. If residential status changes from resident to NRI, then can a 5 year tax saving FD be broken in between? If so, then what are the tax implications?
Please advise.
Regards,
Lalit
1. There is a lock in period of 5 years. Therefore, now you cannot break
2. You cannot break it but for tax deduction it is imp to know whether the bank was aware of your NRI status or not.