Come tax filing season and you may find yourself looking for ways to appease the tax man. Considering the risk involved in open market equities, you may want to settle for something more conventional (well, almost!) - Tax Saving Fixed Deposit. Over the years, the world of personal finance has witnessed the expansion of the fixed deposit portfolio to include some new variants that come with added benefits.

While you would not normally associate tax benefits with fixed deposits, tax-saver fixed deposits are specifically designed to help you save tax. Another key advantage of fixed deposits is that they leverage the power of compounding to help you grow a reserve corpus which can be readily used in the event of a medical emergency, marriage, children’s higher education, retirement and a whole host of other life events.

Whether you are an individual investor, NRI or senior citizen, fixed deposits can form the cornerstone of your diversified investment portfolio, besides giving you a reason to smile even on a rainy day. While the benefits offered by tax-saving fixed deposits are impressive, you might wonder, “What’s the difference between a regular FD and tax saving FD?” Let’s find out.

Tax benefits

You guessed it! The single biggest benefit of a tax-saving fixed deposit is that the investment is exempt from deduction under Section 80C. On the other hand, a regular fixed deposit may offer good returns on investment but does not offer tax benefits.

However, interest earned on tax-saver fixed deposits is taxable according to the provisions of the Income Tax Act, 1961.

Amount invested

In order to qualify for tax benefits, investors need to invest between 1 and 1.5 lakh for a fixed tenure of 5 years in a tax saving fixed deposit plan. For regular fixed deposits, you can invest as much as you like, according to your investment goals.

Lock-in period

With tax saver fixed deposit, you can expect a lock-in (compulsory duration of investment) of five years. Upon maturity, the principal and interest can be reinvested for an additional five years while regular fixed deposits can be renewed indefinitely based on your requirements.

Returns

When it comes to tax-saving fixed deposits, accrued interest is also payable only at the end of the investment period. Investors can opt for staggered interest payments on a monthly, quarterly or yearly basis with regular fixed deposit accounts.

Liquidity

Despite being a long-term investment tool, regular fixed deposits can be liquidated either in full or in part, if you need cash. With tax saving fixed deposits, termination or withdrawal before liquidity is not possible under any circumstances.

Learn more about Mutual Funds here.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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