Tax Exemption on Fixed Deposits
The difference between a normal Fixed Deposit and a tax-saving deposit is the first thing an investor would need to know. With a normal fixed deposit an investor can make a deposit for a period of his/her choice, and will be able to draw the money from the deposit within a week from the date of opening.
The normal Fixed Deposits also do not get any deduction of taxes on this deposit.
Whereas if an investor, takes up a tax saver deposit, he/she will not be able to withdraw the amount invested for a minimum period of 5 years, but will be able to claim for tax deduction as well under section 80C of the Income Tax Act 1961. But the interest earned on the tax savings deposit will still be taxed.
What Exactly is Tax Exemption?
Tax exemption is to be free from tax or not be subject to tax by the government or regulatory authorities. An individual or entity is excused from paying taxes, under single or even multiple tax laws. Many governments even encourage investments in tax-exempt schemes. Income on which tax is not levied is considered tax-exempt.
Are Fixed Deposits Valid for Tax Exemption?
As per the government and the announcement made by the Finance Ministry in 2006, an investment made in a tax saving fixed deposit which has a minimum of 5 years lock-in period is valid and eligible for a tax deduction as per section 80C of the Income Tax Act of 1961. The fixed deposit will need to follow the guidelines to be eligible:
- The deposit maturity will need to be a minimum of 5 years, but it can be extended, to a period of up to 10 years, depending on the bank.
- The minimum amount under this deposit should be Rs. 100 and multiples thereof
- The maximum amount under the deposit should be Rs. 1.5 lakhs per year.
- The deduction is available for only individuals and Hindu Undivided Families (HUF).
- There will be no premature withdrawal for these fixed deposits.
- These fixed deposits will also not have any loan facility attached to them
- TDS will be charged under this deposit, on the interest earned by the deposit if it is over Rs. 10, 000 for a year. The TDS will be paid at the end of the financial year.
The tax saving fixed deposits can be made in either a single or joint name, in case the wherein the tax saving fixed deposit are made in a joint account only one of the holders can claim the deduction as per section 80C of the Income Tax Act 1961.
Tax Exemption for NREs
All NREs who make an investment in a Fixed Deposit will not be taxed for any interest earned on them, and the NRE account will be exempt from taxes under section 10 (4)(ii) as per the Foreign Exchange Management Act, 1999.
Fixed Deposit Tax Exemption Under Section 80C
A tax-saving Fixed Deposit (FD) account is a specific FD type that provides a tax deduction benefit under Section 80C of the Income Tax Act 1961. Investors can avail a deduction of up to Rs. 1.5 lakh annually by investing in a tax-saving Fixed Deposit account. Here are some of its key features:
- A mandatory lock-in period of 5 years.
- The interest earned is subject to taxation.
- The interest rate typically falls within the range of 5.5% to 7.75%.
A Fixed Deposit account takes on various forms, providing individuals and entities with options to save funds for their future. Standard FD accounts typically offer flexibility in choosing the tenure that best suits one's needs. Apart from the regular FD accounts, many banks offer a specialized five-year FD scheme designed for tax-saving purposes.
Investing in a five-year FD scheme under Section 80C of the Income Tax Act, 1961 allows individuals to claim an income tax deduction. It's important to note that the features, advantages, and terms associated with this type of account may differ from those of standard FD accounts. Therefore, there are several key aspects to be aware of when considering such FD accounts to maximize the associated tax benefits.
Advantages of Tax-Saving Fixed Deposits
Fixed Deposit accounts have long been a favoured financial instrument for individuals seeking reliable savings options. These bank-based investment products are closely regulated by the RBI, assuring investors of their safety and low-risk nature. Furthermore, the deposited funds are readily redeemable with interest upon maturity. Here are some of the key benefits of Fixed Deposits:
- Enhanced Interest Earnings - Fixed Deposits offer the potential for higher interest earnings compared to standard savings accounts.
- Lump Sum Deposits - FDs allow for a one-time lump sum deposit, making it a convenient savings option.
- TDS on Interest - Interest earned on Fixed Deposits is subject to Tax Deducted at Source (TDS) as per income tax regulations.
- Minimum Tenure - To avail of tax benefits, a minimum tenure of five years is required, although it can be extended for a longer duration if desired.
- Deposit Flexibility - Fixed Deposits provide flexibility in terms of the deposit amount, catering to the investor's convenience.
- Tax Deductions - Investors can claim income tax deductions of up to Rs. 1,50,000 annually under Section 80C of the Income Tax Act, 1961.
- Premature Withdrawal Constraints - Premature withdrawal options may be limited or carry penalties, depending on the terms and conditions of the specific Fixed Deposit.
Documents Required
For tax-saving Fixed Deposits, you typically need to provide the following documents:
- Identity Proof: Aadhaar, PAN card, Driving License, Passport, Senior Citizen card, Voter ID, etc.
- Address Proof: Passport, Telephone Bill, Electricity Bill, Bank Statement with a Cheque, etc.
Fixed Deposit Tax Exemption under Section 80TTB
Old age often brings a range of health issues, both physical and mental, for senior citizens, which can significantly impact their financial well-being. Hence, it becomes crucial to offer them certain tax deductions to ease their financial burden.
With this consideration in mind, the government continually introduces new regulations to simplify the lives of senior citizens. The Finance Budget of 2018 brought forth various advantages for our elderly population. One notable addition in Budget 2018, specifically for senior citizens, was the introduction of a new provision known as Section 80TTB.
Eligibility for Section 80TTB
Section 80TTB allows a taxpayer who qualifies as a resident senior citizen, aged 60 years or above at any point during a Financial Year (FY), to seek a designated deduction from their gross total income for that Financial Year. This Section has been in effect since 1 April 2018.
Amount of Deductions Available under Section 80TTB
Under Section 80TTB, individuals can claim a deduction of up to Rs. 50,000 or the total income amount, whichever is lower, from their gross total income. The term 'income' in this context includes the following sources of income combined:
- Interest earned on bank deposits (savings or fixed).
- Interest accrued on deposits maintained in a cooperative society involved in banking activities, including cooperative land mortgage banks or cooperative land development banks.
- Interest income generated from post office deposits.
Exceptions to Section 80TTB
Section 80TTB deduction is not applicable to individuals who are partners of a partnership firm, members of an Association of Persons (AOP), or members of a Body of Individuals if the specified deposits are held by or on behalf of such entities when calculating their total income.
Required Documents
When claiming a deduction under Section 80TTB, no special documents are necessary. Your PAN and bank statement are adequate for tax calculation purposes.
FAQs on Tax Exemption on FD
- What is the minimum tenure for the tax saver fixed deposit?
The minimum booking period for a tax saver fixed deposit, is a tenure of 5 years minimum and up to a period of 10 years depending on the bank.
- What are the tax advantages of joint holders in FDs?
For individual account holders, they can receive an income tax deduction of up to Rs. 1.5 lakh per financial year. But, when it comes to joint account holders, the tax benefit is applicable solely to the primary account holder. Any additional account holders are not eligible to claim this benefit.
- Is premature withdrawal allowed under a Tax Saving Deposit?
No, premature withdrawal and partial withdrawal are not allowed as per Tax saving deposits.
- Can I apply for a loan against my tax savings Fixed Deposit?
No, this deposit cannot be used as a pledge for loans and advances in any bank.
- If the tax savings Fixed Deposit is opened jointly, who is eligible for the tax exemption?
Since the tax savings Fixed Deposit is eligible for tax exemption, only one of the joint account members is eligible, it will need to be claimed under the name of the first holder of the account.
- Who is eligible to invest in tax-saving FDs?
Tax-saving Fixed Deposits can be invested in by resident Indian citizens, senior citizens, Hindu Undivided Families (HUFs), and Non-Resident Indians (NRIs).
- Does section 80TTB apply to super senior citizens?
Yes, Section 80TTB is applicable to individuals aged above 60 years, encompassing both senior citizens and super senior citizens.
- Is the interest earned on Fixed Deposits (FDs) taxable?
Yes, the interest earned on Fixed Deposits is taxable as per the Income Tax Act of India. It is added to the depositor's total income and taxed at the applicable slab rates.
- Are there any exemptions available for tax on FD interest?
Yes, under Section 80C of the Income Tax Act, investments made in certain tax-saving FDs are eligible for deductions up to a specified limit. These FDs usually have a lock-in period of five years.
- What is the maximum amount eligible for tax exemption under Section 80C for FD investments?
The maximum amount eligible for tax exemption under Section 80C for FD investments is ₹1.5 lakh per financial year (subject to any revisions made by the government).
- Are all FDs eligible for tax exemption under Section 80C?
No, only specific tax-saving FDs offered by banks and financial institutions are eligible for tax exemption under Section 80C. These FDs typically have a lock-in period of five years.
- Can I claim tax exemption on FD interest for regular FDs without a lock-in period?
No, tax exemption under Section 80C is not applicable to regular FDs without a lock-in period. Interest earned on such FDs is fully taxable as per the depositor's income tax slab.
- How do I avail a tax exemption on FD investments under Section 80C?
To avail tax exemption on FD investments under Section 80C, you need to invest in eligible tax-saving FDs offered by banks or financial institutions. Ensure that the FD has a lock-in period of five years and keep track of the investment amount for tax filing purposes.
- Can I invest more than ₹1.5 lakh in tax-saving FDs to claim additional tax benefits?
While you can invest more than Rs.1.5 lakh in tax-saving FDs, the maximum tax exemption under Section 80C is limited to Rs.1.5 lakh. Investing additional amounts may provide financial security but won't offer additional tax benefits under this section.
- Are senior citizens eligible for any special tax benefits on FD interest?
Yes, senior citizens (individuals aged 60 years and above) are eligible for a higher basic exemption limit on interest income earned from FDs. They can claim tax deduction up to ₹50,000 on interest income earned from FDs under Section 80TTB.
- Are there any other tax implications I should be aware of regarding FD investments?
Yes, apart from income tax on interest earned, TDS (Tax Deducted at Source) is applicable on FD interest if it exceeds Rs.40,000 (Rs.50,000 for senior citizens) in a financial year. Additionally, if your total income exceeds the basic exemption limit, you may be liable to pay taxes accordingly.
- Where can I find detailed information about tax exemptions and implications related to FD investments?
You can refer to the official website of the Income Tax Department of India or consult a qualified tax advisor for detailed information regarding tax exemptions, implications, and other related queries specific to your financial situation and investment portfolio.
- Can I avail myself of a loan against my tax saving fixed deposit?
Yes, many banks offer loans against fixed deposits as collateral. The loan amount can typically be up to 90% of the FD value, and the interest rates are relatively lower compared to other types of loans.
- How much is the minimum amount required to open an FD account?
The minimum amount required to open an FD account varies from bank to bank. It can range from as low as Rs. 1,000 to Rs. 10,000 or more, depending on the bank’s policies.
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