Fixed deposit: How to save tax by investing in FDs, experts decode formula for investors

Tax-saving FDs: The deadline for filing taxes for the year is just weeks away, and at this time, taxpayers are looking for tax-saving investments.

One way taxpayers can save tax is through tax-saving Fixed Deposits (FDs).

This option not only saves tax but is also less risky than the available investment options.

Taxpayers who invest in tax-saving FDs can get a deduction under Section 80C of the Income Tax Act. 

Let’s have a look at how to save tax through tax-saving FDs:

What is a tax-saving FD account? 

As the name suggests, a tax-saving FD account is a type of FD account that provides a tax deduction under Section 80C of the Income Tax Act of 1961.

By investing in a tax-saving fixed deposit account, any investor can claim a deduction of up to Rs. 1.5 lakh per year.

Some of its characteristics include:

- A 5-year lock-in period

- Earned interest is taxable

Benefits of a tax-saving account 

According to CA Ruchika Bhagat, MD, Neeraj Bhagat & Co., following are the benefits of tax-saving FDs: 

- As the Reserve Bank of India (RBI) is hiking the repo rate, banks are giving attractive interest rates on FDs.

- Senior citizens get additional interest on FDs.

- Any investment in a tax-saving FD for five years or more can be claimed as a deduction under Section 80C of the Income Tax Act.

- Banks don’t cut TDS on interest if an investor files Form 15G or 15H.

- Taxpayers can claim a deduction on a Fixed Deposit Receipt (FDR) under 80TTB of up to Rs 50,000.

- FDR also provides easy liquidity.

- Interest received from FDR is treated under head Income From Other Sources and any expense that is incurred wholly and exclusively to earn this income is allowed as a deduction from interest income.

Senior citizens can also claim deductions up to Rs.50,000/- u/s 80TTB under the old tax regime.

Tax-saving FD: How to claim FD deduction under Section 80C and 80TTB?

Investors can avail of a deduction up to Rs 1,50,000 under Section 80C of the Income Tax Act of 1961 for their investment in a fixed deposit.

According to tax expert Sunil Garg, if an investor opens an FD account by investing Rs 5 lakh, they can claim a Rs 150,000 deduction under Section 80C on the Rs 5 lakh deposit. However, the interest earned on the FD will be taxable to the general public.

He added that senior citizens can file a deduction of Rs 50,000, which comes under Section 80TTB, on interest on their FD.