Fixed deposits (FD) is one of the most favored risk free investment instruments in India. In a Fixed Deposit scheme, an investor can invest money for a fixed tenure at a predefined interest rate. As it’s invested for a fixed term, it’s also known as term deposit.
Different types of Fixed Deposit schemes are available in India to invest for a specific term. However, Income Tax act allows tax deduction only on those fixed deposits which comes with a lock-in period of 5 years. These FDs are popularly known as tax saving fixed deposits.
As per the present tax laws, an individual can claim tax deduction under section 80C for an amount of up to Rs. 1,50,000 for the amount invested in a FD with lock-in period of 5 years. The amount invested in a 5 years Fixed Deposit has to be claimed as tax deductions under section 80C out of the gross total income to arrive at the taxable income.
To get eligible for tax deduction, assessee can invest in any fixed deposits of public or private bank. 5 years time deposit with a post office also qualifies for tax deduction under section 80C.
However, 5 years FD with co-operative banks and rural banks are not eligible for section 80C tax deductions.
Interests earned on these Fixed Deposits are taxable based on the slab rates applicable to the individual. Bank has to deduct tax on your interest income at the rate of 10%.
You can refer our article on “TDS on Interest on Fixed deposits”.
If any amount including accrued interest has been withdrawn by the assessee from his accounts before the expiry of 5 years from the date of deposit, the amount so withdrawn shall be deemed to be the income of the assessee. Such amount will be liable to tax in the year of withdrawal.
You can also invest in better tax saving risk free instruments such as public provident fund or life insurance premium to get more tax benefits.
