Last Updated on September 17, 2019 by Gopal Gidwani
As soon as you start your first job, you will begin getting advice on two topics - tax and savings. Every relative and friend will have their own two cents on schemes that offer maximum returns and ways to minimise the tax you pay. You may have heard your parents discussing many of these topics amongst themselves or with their friends. One of the most talked-about and favoured ways of saving money is an FD or a fixed deposit.
However, did you know that there are two different fixed deposit? There is a tax saving FD and a normal FD. What is the difference between these and which one should you choose? Let’s find out!
Tenure
A normal FD’s tenure ranges from 7 days to 10 years. You deposit the desired amount in the fixed deposit and let it mature for the said tenure. You will get the amount plus interest upon maturity. The tenure for a tax-saving FD is fixed at five years. Five years may not seem too long. But it is necessary to note that the FD is locked in for this period. You cannot liquidate it before the five years are up. Normal fixed deposit offers more flexibility. You can liquidate it by paying a small fee.
Tax Benefit
As per Section 80C of the Income Tax Act, 1961, you can claim an exemption of up to INR 1.5 lakhs for investment under various schemes in a financial year. This amount can be spread out over different saving schemes or can be invested in a single scheme. The said exemption is only available for the money invested in tax saving FD. When you deposit money in a normal FD, it will be a long-term saving plan. But it will not get you any tax exemptions.
To put things into perspective, let us assume that you are in the 30% tax bracket, and decide the invest INR 1.5 lakhs in an FD. If you choose normal FD, this amount will be included in your income. If you choose to invest in a tax-saving FD, this amount will be deducted from your annual income, and you save 30% of INR 1.5 lakhs, that is INR 45,000 in taxes.
Interest
You earn some amount every year from the interest on the FD based on the current FD rates. This interest is included in your income while calculating taxes. You can choose monthly or quarterly interest payout, or you can reinvest the interest. You can use an FD rate calculator to figure out how much you will earn as an interest every month.
Irrespective of which FD you choose, the interest earned on the FD is taxable. If the interest income you get in a financial year across all deposits exceeds INR 40,000 (INR 50,000 for senior citizens), the bank will deduct a TDS of 10%. If you haven’t submitted your PAN card details, this becomes 20%.
Which One to Choose?
At first glance, the tax-saving FD might seem like the obvious choice for investment. You save money, earn interest and also get a tax benefit. However, the amount gets locked-in for five years and you get a one-time tax exemption. It is also a great way to save up for a particular financial goal. If you are not ready to commit for five years and want more flexibility, you should choose a normal FD that offers the highest FD rates.