How to Use Fixed Deposits as Tax-saving Instruments?

Fixed deposit, a popular investment instrument, can also be used to bring down the tax burden on your income. The first thing that any investor needs to understand is that the normal fixed deposits and the tax-saving fixed deposits are two different investments.

The primary condition that differentiates the tax-saving fixed deposits with the normal fixed deposits is that the investor will have to lock in the investment for 5 years. Any premature withdrawal under this category will not qualify for tax deduction. In the case of normal fixed deposits, the investor can take back their money at any point, and pay a penalty if the deposit is taken out before the end of the specified time period.

The tax benefit in the tax-saving fixed deposits is a deduction from the taxable income of the individual under Section 80 C of the Income Tax. The upper limit of investment under this instrument is 1.5 lakh, and the minimum amount that can be invested is Rs 100.

The interest that is earned on the deposit remains taxable just like the situation witnessed in a normal fixed deposit. Something common in both the types of fixed deposits is that there is necessary tax deducted at source.

The Interest rates, like any other instrument, are fixed by the bank, usually in line with other deposits of similar tenure. Interest earned on the investment can either be paid-out or reinvested/compounded. In case of a jointly-held investment, deduction can only be claimed by the primary holder.