Why bank fixed deposit is not a tax free investment

Bank fixed deposit or FD is a very popular investment option among investors looking for a guaranteed return. Fixed deposit can be defined as a financial instrument invested for a fixed tenure at a pre-defined interest rate.

If you are investing into a bank fixed deposits to get tax deduction or with a expectation that it will save you tax with good return, then read below article before investing.

5 Years fixed deposit eligible for tax deduction U/S 80C

You can invest into a 1, 2, 3 or 5 year bank fixed deposit to get guaranteed interest from a bank.

For whatever period you have invested, only 5 years bank fixed deposit is eligible for tax deduction under section 80C of income tax act, 1961.

This means not all fixed deposits are tax deductible under section 80C. If the tenure is below 5 years, then deduction under section 80C is not allowed.

To get deduction under section 80C, you need to invest your money in a 5 years fixed deposit with a bank.

5 Years post office time deposit scheme also qualify for section 80C deduction.

Maximum Limit for section 80C tax Deduction

If you have invested in a 5 year fixed deposit or FD, the amount so invested can be claimed as tax deduction from your gross total income to reduce your taxable income.

Section 80C has specified certain investments to get tax deduction if an individual invest into it during the financial year. This section has a list of investment options to get eligible for deduction which includes public provident fund scheme, life insurance premium, contribution to employee provident fund and fixed deposits.

Now the question is, how much deduction is available for you if you invest in a 5 years bank fixed deposit?

Section 80C tax deduction is available to you up to a maximum limit of Rs 1,50,000 if you have invested in one or more than one or all of the investment options.

This means if your investment into a 5 years fixed deposit is Rs 15,000 and into other eligible investments is Nil, then Rs 15,000 is allowed as tax deduction for the year in which you have invested.

If you have invested Rs 15,000 in a bank FD and Rs 30,000 in public provident fund and Rs 15,000 in life insurance policy, then total Rs 60,000 will be allowed as deduction under section 80C. This means limit of Rs 1,50,000 as specified in section 80C is not allowed only for 5 years FD, its for all the eligible investments.

If your investment into these eligible investments except 5 years bank fixed deposit is Rs 1,50,000, then investing in a FD will given you zero tax benefits.

Interest from fixed deposit is not tax free

A bank fixed deposit generate interest income for you. You can either give a instruction to bank for transferring the interest amount to your bank saving account or you can get it at the time of maturity.

Whenever you incur the interest amount, you need to remember that it’s charged to tax under the head “Income From Other Sources”. It’s not tax free or exempted like in case PPF or sukanya samriddhi yojana.

However, a senior citizen can claim deduction of upto Rs 50,000 on interest earned from fixed deposits as per section 80TTB with effect from financial year 2018-19.

If you invest in a fixed deposit in the name of your non-working spouse or minor child to avoid interest on tax, then you are making a mistake. Interest from such fixed deposits will get added to your income and taxed as if it’s your income.

Tax saving tips to get maximum benefit

Please remember, to claim tax benefits, you always have option to invest on or before 31st march of the year instead of investing before the deadline specified by the employer. Take the right investment decision to claim tax benefits.

You can plan your investments at the beginning of the previous year to avoid any mistakes at the end in a hurry.

For instance, if you want to invest in a long term investment scheme to get tax free income in addition to section 80C deduction, then investing in public provident fund can be a better choice. You can invest up to a maximum amount of Rs 1,50,000 in a year to get tax benefits.

A public provident fund is falling into the EEE category. This means investing into PPF is exempt, interest income generated every year is exempt and maturity proceeds is also exempted.

If your interest from bank FDs per year is Rs. 10, 000 or more then bank will deduct TDS at the rate of 10%. In the budget 2018, government has decided to increase this limit further by Rs 40,000 with effect from 1st of April 2018 for senior citizens.

If you are not taxable then TDS on interest from fixed deposit can be avoided by submitting form 15G or 15H to the bank. Don’t forget to quote your Permanent account number or PAN in these forms or else it will be treated as invalid.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.