Fixed Deposit Tax Exemption Under Section 80C

A fixed deposit is a financial instrument provided by banks and NBFCs which involves a fixed interest rate in return of non-withdrawal of funds for a fixed period of time. While there are various types of fixed deposit available, these are broadly categorized into normal fixed deposit and tax saver deposit.Unlike normal deposits in which one can withdraw money even within a week of opening, tax saver deposits do not allow withdrawals for a minimum of 5 years but will allow fixed deposit income tax exemption under Section 80C of Income Tax Act. However, the interest earned on the deposit is taxable.

Fixed deposit income tax exemption refers to exemption from tax or deposits that are not subject to tax deductions by government or regular authorities. The individual opting for a tax saver deposit is excused from paying taxes under Section 80C of Income Tax Act of India, 1961.Section 80C prevents any investment made under the tax-saving fixed deposit of a minimum of 5 years to be tax exempted. However, the fixed deposit needs to follow the below guidelines for fixed deposit income tax exemption eligible:

• The deposit maturity will need to be of a minimum of 5 years that can be up to 10 years, depending on the financial institution.
• The minimum amount to be invested should be ₹100 and multiples thereof.
• The maximum amount for fixed deposit income tax exemption can be ₹1.5 lakhs per year.
• The exemption on tax-saver deposits is only available for individuals and Hindu Undivided Families.
• These types of fixed deposits do not have loan facility attached to them.

While tax saving deposits can be opened under a single name or joint name, the fixed deposit income tax exemption is only available for one of the holders in case of a joint account as per Section 80C of Income Tax Act of India, 1961.

Here are a few points to consider when making an investment in any tax-saver deposit:

• As mentioned above, only individuals and HUFs are eligible for tax saving deposits.
• The fixed deposit must be for a minimum amount depending on banks but cannot exceed ₹1.5 lakhs per year for fixed deposit income tax exemption under Section 80C.
• Premature withdrawals are not allowed.
• An individual can open a tax-saver deposit only through the public or private sector banks.
• The interest earned on the deposit is taxable if the interest exceeds ₹40,000 in a financial year.

Tax saving deposits offer a varied range of benefits apart from fixed deposit income tax exemption. It is a safer debt instrument in comparison to other tax saving schemes.

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.