Mrs. Sharma, Rishi’s mother had just come back from a long day from office. As she sat down for lunch with her 10-year-old son, Rishi, he looked up with curiosity in his eyes and asked, “Mom, what are tax saving FDs and how much is tax saving FD rates, and why are they important? Can you tell me more about them?”

Mrs. Sharma smiled at her inquisitive son and began to explain, “Well, Rishi, tax-saving Fixed Deposits (FDs) are a smart Financial tool that allows individuals to both save money and reduce their tax liability. They come under Section 80C of the Income Tax Act, which allows you to claim deductions up to Rs. 1.50 lakh from your taxable income.”

Rishi’s eyes widened as he tried to grasp the concept. Mrs. Sharma continued, “Here are some strategies for maximising the benefits from tax-saving FDs under Section 80C, Rishi –

Invest the maximum limit

Under Section 80C of the Income Tax Act, you have the opportunity to invest up to Rs. 1.5 lakh per financial year in tax-saving FDs. It’s essential to make the most of this tax-saving benefit by investing the maximum allowable amount. By doing so, you can effectively reduce your taxable income by Rs. 1.5 lakh, resulting in lower tax liability.

Choose the right bank

Selecting the right bank is the foundation of your tax-saving FD strategy. Look for a reputable and reliable financial institution to ensure the safety of your investment. Beyond trustworthiness, compare interest rates offered by different banks. Even a slight variation in interest rates can significantly impact your returns over time. Conduct thorough research, seek recommendations, and consider the bank’s track record in handling FDs to make an informed choice.

Lock-in period

Tax-saving FDs come with a mandatory lock-in period of 5 years. This means you cannot withdraw the funds during this period without facing penalties and losing the associated tax benefits. Before investing, carefully evaluate your financial situation and commitment to ensure you can comfortably maintain the FD for the entire lock-in period.

Interest payout frequency

Tax-saving FDs typically offer options for interest payout frequencies, including monthly, quarterly, or annually. Your choice should align with your financial requirements. If you rely on the interest income for regular expenses, opt for more frequent interest payouts to support your cash flow.

Ladder your investments

Laddering your investments is a strategy that enhances liquidity and flexibility. Instead of depositing your entire investment in one FD, distribute it across multiple FDs with staggered maturity dates. This approach allows you to access funds at different intervals without prematurely breaking the entire investment, maintaining your tax benefits while meeting financial needs as they arise.

Auto-renewal

Many tax-saving FDs offer an auto-renewal feature. After the initial 5-year lock-in period, your FD automatically renews for another term. This convenient feature ensures that your money continues to earn interest without requiring manual intervention, allowing your savings to grow seamlessly.

Joint accounts

For married individuals, consider opening a joint FD account with your spouse. This option enables both you and your spouse to maximise the benefit of deduction under 80C. The interest earned can be divided between both of you, effectively doubling the tax-saving potential.

Nomination

Naming a nominee is a critical step when opening a tax-saving FD. By doing so, you designate a family member who can claim the funds in the event of your untimely demise. This process simplifies the transfer of the investment to your loved ones, avoiding legal complications during a challenging time.

Beneficiary clause

Some banks offer a ‘Beneficiary Clause’ feature, allowing your nominee to access the funds during emergencies, even within the lock-in period. This additional layer of financial security ensures that your funds remain accessible when urgently needed, offering peace of mind.

Understand TDS

Gain a clear understanding of Tax Deducted at Source (TDS) implications related to your FD interest. If the interest income surpasses certain thresholds, the bank may deduct TDS before disbursing the interest. You can claim a refund or adjust it against your tax liability when filing your income tax return.

Tax on interest

It’s essential to be aware that the interest earned on tax-saving FDs is taxable as per your income tax slab. To prevent surprises during tax filing, plan for the associated tax liability by setting aside a portion of the interest income for tax payments.

Reinvest the interest

Instead of withdrawing the interest, consider reinvesting it in another tax-saving FD. This strategy allows you to harness the power of compounding, as the interest earned on the reinvested amount also qualifies for tax benefits, helping your savings grow more effectively over time.

Loan against FD

Some banks offer the option to take a loan against your tax-saving FDs. This can be a valuable resource during emergencies, allowing you to access funds without breaking the FD prematurely and losing the associated tax benefits.

Use senior citizen benefits

If you are a senior citizen, take advantage of the preferential interest rates available for your age group. Senior citizens typically receive higher interest rates on their FDs, enhancing the returns on your tax-saving investment.

Review annually

Regularly reviewing your tax-saving FDs is vital for ensuring they continue to align with your financial goals and tax-saving needs. Circumstances change over time, so it’s essential to make necessary adjustments to optimise your investment strategy. This annual assessment ensures that your financial planning remains effective and adaptable to your evolving needs.

Rishi listened carefully, taking in the valuable information his mother shared. He nodded, absorbing the strategies. “Thanks, Mom,” he said with a smile. “I’ll remember these when I grow up.”

Mrs. Sharma ruffled Rishi’s hair affectionately. “You’re welcome, Rishi. Remember, financial planning is essential, and tax-saving FDs are just one way to secure your future. With the right strategies, you can make the most of your investments and save on taxes too.”

As they finished their lunch, Rishi felt more informed and determined to make wise financial decisions when the time came. Mrs. Sharma knew she had given her son a valuable lesson in financial planning, one that would stay with him for a lifetime.