One can create a fixed deposit (FD) account for a period starting from one year to as long as 10 years. However, a five-year fixed deposit is unique as it can offer tax-saving benefits. One thing is that your money gets locked in the deposit for five full years, however considering the tax-saving benefits, it can be a profitable investment option for many taxpayers.
In this piece of article, we will talk about the features and suitability of the tax-saving FD.
How does a five-year tax-saving FD operate?
A tax-saving five year fixed deposit will work in the same manner as any other general fixed deposit account where you invest a lump-sum amount for a fixed tenure (five years, in this case).
This is one of the safest investment options where the money invested remains safe and earns interest at a predetermined rate. The rate of interest will be more or less similar to the interest as other non-tax saving FDs. The best part about fixed deposits is that the investment or its return will not suffer even if the market conditions are unfavourable. Your principal will continue earning a steady rate of interest. The drawback here is that you will not be able to withdraw the money at any time before maturity.
Here are some essential things you should know about tax-saving FDs before you dive in:
- Tax-saving FD allows you to claim deduction under Section 80C up to Rs.1.5 lakh in one financial year.
- The interest income from the tax-saving FD is taxable. Also, they may attract TDS provisions under Section 194A.
- The investor cannot avail credit facilities such as loans, overdrafts on these tax-saving fixed deposits.
- The taxpayer cannot pre-maturely withdraw the amount from such tax-saving fixed deposits.
- The interest rate is fixed on the creation date of such fixed deposits and remains the same throughout the five-year tenure.
- The rate of interest of tax-saving FD varies across all the banks.
- Tax-saving FDs have a flexible interest pay-out. One can choose to reinvest the interest or choose for monthly or quarterly interest pay-outs.
- Tax-saving FD can be held in a single name or joint account. If held jointly, the tax deduction benefits are available only to the first account holder.
Who should invest in a tax-saving five-year deposit?
Before choosing any investment option, the investor should consider four vital factors, age bracket, investment horizon, liquidity requirement and risk appetite.
Considering these four factors, a tax-saving FD will be a suitable investment option for you, if:
- You have a low or moderate risk appetite
If you belong to a higher age group or have a low-risk appetite, then you may consider investing in the tax-saving FD. Also, If you wish to stay away from market fluctuations and earn guaranteed returns, you may invest in these schemes.
- You can block funds for five years
One should remember to consider the liquidity aspect while investing in this scheme. Once a five-year tenure tax-saving FD is created, you cannot liquidate your investments anytime in between. Hence, ensure that you have an emergency fund before committing to five years of fixed deposit investments so you won’t feel helpless in case of contingencies.
- You want to save tax
If you want your money to offer dual benefits of low risk with assured returns, plus provide tax benefits, then five years FD can be a part of your investment portfolio.
How to open a tax-saving fixed deposit account?
You can easily open a five-year tax-saving fixed deposit online sitting at home. You may skim through different banks offering interest rates on these tax-saving deposits and compare the interest rates and FD features. Remember to use an FD calculator by Clear to see how much your investment will grow after five years.
If you already have an account with the bank, your work gets easier as you can create the FD using internet banking. If you wish to open a tax-saving FD in a bank where you don’t hold an account, you will have to submit KYC documents like identity proof, address proof, etc. These documents will have to be submitted along with a filled up and signed application form.
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I am a Chartered Accountant by profession with 4+ years of experience in the finance domain. I consider myself as someone who yearns to explore the world through travelling & Reading. I believe, the knowledge & wisdom that reading gives has helped me shape my perspective towards life, career and relationships. I enjoy meeting new people & learning about their lives & backgrounds. My mantra is to find inspiration from everyday life & thrive to be better each day.