fixed deposit Archives -

Tax Saving Bank Fixed Deposit Vs Post Office Time Deposit – Where To Invest?

Tue, 13 Sep 2022 17:28:54 +0000

The Buyt Desk

Tax Saving bank Fixed Deposit and Post Office Time Deposit are two types of investment which help you in saving tax too. While both have a tax benefit under Income Tax Act, the purposes of both are different.

Investors with a low-risk appetite can reduce their taxable income by opting for tax-saving investments. Tax advantage fixed deposits come with a fixed lock-in period. They help in saving tax and earnig returns as well. Investors know that they have to park their money in Fixed Deposit (FD) but are confused between bank and post office. Both Post offices and bank offer investors various tax-saving deposit schemes including Bank FD and Post Office Term Deposits (TD).

Tax benefits

Under Section 80C of the Income Tax Act, 1961, Deposit schemes are eligible for the tax benefit which is up to Rs 1.5 lakh tax deductions on investments. But you should not invest in these schemes only for tax benefits. Invest in these schemes only if it matches your personal finance plan and is in line with your investment strategies. These tax-advantaged FDs or TDs may not fit in everyone’s financial plan but are a good fit for people with low-risk appetites. You should also keep in mind all the TD and FD aspects before making the investment.

What are the features of a Bank Fixed Deposit?

After a minimum lock-in period of 5 years, the interest earned on Bank FDs is taxed as per the investor’s tax bracket.
If the FD investment is made jointly, only the first holder as per the FD receipt will be eligible for tax advantages.
Investors can either opt for cumulative or non-cumulative interest alternatives on tax-saving FDs.
Tax-saving FDs with a five-year lock-in period do not allow premature withdrawals.
For medium-term investments with tax-saving benefits, tax-saving FDs with a 5-year lock-in term are ideal.
Banks are offering interest rates between 6.25% – 6.5% currently on this scheme.
An additional 0.50% interest rate is offered for senior citizens. Few banks offer a special scheme with additional benefits for senior citizens.

What are the features of Post Office Time Deposit (POTS)?

POTS is also known as National Saving Time Deposit Account.
Under Section 80C of the Income Tax Act of India, 1961, the 5-year fixed deposit account is eligible for an income tax deduction like Bank FDs.
Interest on the TD at the post office is calculated on a quarterly basis and paid annually.
Withdrawing the investment before it matures from the POTS’ tax-deferred savings account is not allowed.
POTD has a term option of four investment periods of one year, two years, three years and five years with a 5 year period offering a 6.7% interest rate and the rest with a 5.5% interest rate.

Tax Deducted at Source (TDS)

On tax-saving fixed deposits, FD interest is paid out either monthly or quarterly. Investors can choose to have it or put it back into the market. The interest earned is taxed as per the tax band of the investor.

Summing up

TDs from post offices and FDs from banks are significantly identical. But both have certain distinct features. Bank FD’s interest rates vary from one to another as they are regulated by individual banks. While Post Office TD’s interest rates remain the same across the country and change quarterly, as they are managed by post offices. POTD is backed by the government of India while Bank FDs are not. Bank FDs can be bought for a short duration of four days or for a long term of 10 ten years. But only four terms are available with POTDs which are one, two, three or five-year POTD. POTD have better interest rates when compared to bank FDs. But POTDs do not offer better tax-saving interest rates to senior citizens like bank FDs.

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Fixed Deposit : Interest, Types and Taxes – How it Works?

Thu, 29 Oct 2020 07:21:55 +0000

By Priyanka Sambhav

Fixed Deposit or FD is a low-risk investment with assured returns. It is offered by banks and non-banking financial companies(NBFC’s). It is a sure shot formula of growing your saving. You deposit a lump sum amount in your bank for a fixed period of tenure with the surety of receiving an agreed interest on your deposit. When FD attains maturity, you receive the amount that you have invested plus you also earn interest on interest, i.e. the benefit of compound interest. This helps in faster growth of your deposit and helps you in accumulating a significant amount.

USP of Fixed Deposit

The name fixed deposit in itself suggests the return is fixed and does not fluctuate so this ensures a guaranteed return over some time. The charm of FD is that it is not market-linked, so it has negligible risk. Bank FD’s are covered by insurance under DICGC( Deposit Insurance and Credit Guarantee Corporation). The deposit insurance program protects bank deposit of up to Rs 5 lakh of each depositor in case the bank faces closure or any default.

Tenure Of FD

It may differ from bank to bank. Fixed deposit can be of a short period of 7 days and a maximum of 10 years.

Interest of FD

The interest of FD vary from bank to bank and depends upon the period you choose to invest for. A fixed deposit of one year with SBI will earn you a 4.90% interest whereas if you invest for 5 years, then SBI’s FD interest is 5.40%. HDFC bank gives you a 5% interest on a 1-year deposit and 5.50% of interest if you deposit for 5 years. Senior citizens get a bit higher interest on their FD investment. For instance, SBI’s interest rate for Senior citizen (60 years and above) is 0.50% above the rate payable otherwise.

Tax on FD

The interest of FD is taxable in the hands of investors. The interest earned will be taxed at the rate applicable to your income tax slab. Banks will deduct a TDS of 10% (7.5% between 14th May 2020 and 31st March 2021) on fixed deposit if the sum of interest income exceeds Rs. 40,000 in one bank. The limit is Rs. 50000 for senior citizens. In case the depositor doesn’t furnish his//her PAN details the bank will deduct a 20% TDS. If your total income including the interest income is below the threshold limit to which income tax does not apply then you can always claim a refund of the TDS or opt for submitting form 15G ( 15H in case of senior citizen) to your bank for avoiding TDS.

Cumulative and non-cumulative FD

These are the broad categories of FD. In a cumulative FD interest is compounded quarterly basis but is paid out only at the time of maturity. A non-cumulative FD interest is paid out monthly, quarterly or half-yearly basis as per your choice.

4 Types of FD

Bank FD– Also known as the term deposit, and it is a regular Fixed deposit offered by banks. Bank FD’s have a tenure of 7 days to 10 years. The interest in bank FD is a bit higher than what you earn from your saving accounts interest. Money is locked in for the tenure you decide to deposit. Interest is taxed, and banks also deduct TDS.
Tax Saving FD– This helps you in saving tax. Money is locked for 5 years and the investment amount up to Rs 1.5 Lakh is eligible for claiming deduction under Section 80C of the income tax act. Rate of interest is in the range of 5.50- 7.50% depending upon the bank. The interest which is fixed at the beginning of the 5-year term remains the same till its maturity. .Interest earned on tax-saving FD is taxable.
Post office FD- They are also known as Post office Time deposit(POTD) and are similar to bank FD, but you open these FD in the post office. Tenure of POTD ranges from 1 to 5 years. Even a minor above the age of 10 years can have a post office FD. Premature withdrawal is allowed, but it may result in reduced interest benefit. The deposit of 5-year lock-in is eligible for a tax deduction under 80C. Interest in post office term deposit is in the 5.50- 6.70%.
Corporate FD– Company Fixed Deposit or corporate FD’s are an investment option provided by NBFC’s and some other private companies. They are on the basic framework of fixed deposit wherein you deposit a certain amount for a fixed year and receive interest on it. Companies tend to give higher interest than the usual bank or post office time deposit and hence more tempting in terms of return. But a word of caution, corporate FD are not covered under DICGC( Deposit Insurance and Credit Guarantee Corporation- wherein your money has an insurance cover of Rs 5 lakh). As far as corporate FD are concerned, the reputation of the company becomes very important. There have been few company-specific incidences where company have defaulted in paying back. So the credit health and companies background is something that you should not ignore. Credit health of the companies is determined by the various credit rating agencies like CRISIL, ICRA and CARE. Check for an average ‘stable’ rating by credit agency but if it is less than average then you should reconsider.

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