Invest Your Surplus Funds in Income Tax Saving Fixed Deposits

Fixed deposits are one the most secure and risk free ways to invest money. However the interest generated by ordinary fixed deposit schemes is taxable. Since 2006, the government has allowed five –year tax saving FD in India. Under section 80 of the Income tax act, you are eligible for tax savings upto Rs 1 lakh. These special five year fixed deposits have been bought under the ambit of this scheme. These FDs will be locked in for a five-year tenure from the start of the policy. These policies have no option of premature withdrawal, in fact all the usual perks and schemes associated with ordinary fixed deposits are not available while opting for this type of tax saving fixed deposit. There is no option for premature withdrawal even with a penalty. This deposit cannot be pledged as security or collateral for a loan. Banks do not offer an overdraft on this policy. They do not even offer any credit cards with credit limits linked to the amount of the deposit. These policies also cannot be linked to savings accounts and this means that the automatic sweep in of funds on maturity is not possible. The reason for these exclusions is that the FD is meant as a tax saver and therefore is to be treated as such and not an investment. Like insurance policies and mutual funds, these deposits are covered by Section 80 C of the Income Tax Act. When compared to other options like Public Provident Fund and Nationals Savings Certificates, the tax saver fixed deposits have certain advantages and disadvantages. In case of PPF, the funds are locked for 15 years but you can avail of a loan against the funds in your PPF account after the end of the first year and before the closing of the fifth year. This factor makes the PPF a more liquid investment but its value is lower and tax breaks are fixed. If you withdraw your funds from the PPF account after 5 years of opening the account, the tax saver FD will give you higher returns than the PPF. The major factor that determines the final sum is the periodicity of the interest calculation. The smaller the period of interest calculation the larger is the payout you will receive. Most tax-saver deposits offer an interest rate between 8.5-9% per annum while as the PPF and NSC give you a flat rate of 8% per annum. The fact to remember is that interest on the FD is calculated on a quarterly basis, while the other are calculated on an annual basis. This ensures that FDs are a higher yield earner inspite of the income from a PPF and NSC being tax free. Another factor that affects tax saver deposits is the tax bracket that you are in, if you are in the top most tax bracket then a tax saver FD in India could potentially save you approximately 30 per cent. But if you are in a lower tax bracket, then the savings are proportionately lower.