Lot of people selects Tax saving Fix deposit for tax saving purpose under section 80 C, Do you think this is right investment instrument for Tax saving purpose? Or in other words this tax saving fix deposit is really tax saving? Let’s check out few interesting details.
What is a tax saving fixed deposit?
- Fixed deposit offered by banks for Tax Saving purpose
- Interest rates on this FD depends on the bank
- This deposit is locked in for 5 years
- You can get a tax benefit during the year of investment under section 80C
- The final interest you get after 5 years is taxable
These details must be known to you but have you ever tried in calculating expected return from this FD & actual tax saving?
What is the final return & tax saving you can expect from a tax saving fixed deposit?
Consider you are planning to purchase tax saving FD of Rs. 10,000 giving an annual interest of 8.5% compounded every quarter. On maturity you should get Rs. 15,227. Out of this, Rs. 5,227 is the interest portion that is taxable in the year you get it.
Tax saving on this fix deposit will depends on which tax slab you are in.
- Tax slab of 10% – Rs. 1,030 tax exemption
- Tax slab of 20% – Rs. 2,060 tax exemption
- Tax slab of 30% – Rs. 3,090 tax exemption
If you are in the 30% tax bracket, then this will mean that you are investing effectively Rs. 6,910 (investment of Rs. 10,000 minus tax exemption benefit of Rs. 3,090). For the 20% bracket this effective investment is Rs. 7,940, while it is Rs. 8,970 for the 10% tax bracket.
On maturity after 5 years you will get the FD back with the interest. The interest of Rs. 5,227 is taxable and will depend on your tax bracket during that year.
- Tax slab of 10% – Rs. 538 tax to be paid on interest in the 5th year
- Tax slab of 20% – Rs. 1,076 tax to be paid on interest in the 5th year
- Tax slab of 30% – Rs. 1,615 tax to be paid on interest in the 5th year
This tax saving deposit will be less beneficial if you are in lower tax slab. For higher tax slab it will be bring more tax saving & return benefit.
One key factor you must take in to account before making investment is tax saving FD is locked in for 5 years; you cannot withdraw your funds or close this FD before this 5 year duration. Banks also do not offer any loans on this fixed deposit. Taxes saving FD’s are therefore not very liquid.
Ultimately taxes saving fix deposits are for long term investment option so in case you are planning to purchase try to link it with your future goal 5 year & above. Under no circumstances treat this as a short term fund, or else you will find yourself short of funds when you need it.