Tax – Saving Fixed Deposits

In Budget 2006, the government extended tax benefits under section 80C of Income Tax Act, 1961 to five-year tax-saver deposits. As per this provision, a tax-payer is eligible for exemption on five-year deposits on investments up to Rs 1 lakh. These fixed deposits are locked in for a five-year period . There is no option of premature withdrawal. Also, you cannot pledge this type of term deposit as collateral to secure a loan to meet liquidity needs. Similarly, banks do not offer overdraft facility on tax-saver deposits.Unlike the plain vanilla fixed-deposit products, these tax-saver FDs do not have the sweep-in facility. This means a person cannot link fixed deposit to their savings account so that the surplus funds in the savings account can be automatically invested in this fixed deposit.In addition, there is no overdraft facility available on the tax-saver FD. As this instrument of saving money is special due to its tax-saving status, banks do not extend relationship benefits on the tax-saver FD.

Compared to ordinary FDs,Tax-Saving Fixed Deposits, thus, do have drawbacks.But on the other hand they do offer some scope for tax-saving.Now that the interest rates on these deposits have risen along with that of ordinary fixed deposits,it might be advisable to invest some money,upto a maximum of Rs 1 lakh, into these deposits as part of our tax-saving plan.To locate the best Tax-Saving FDs you can use this link:http://www.ratekhoj.com/fixed-deposits/tax-savings-fixed-deposits/tssresults.php?citizentype=non-senior&sorttype=rate&sortorder=DESC. The link on the left will also pull up senior-citizen rates.

One important point to remember is that the principal invested into these deposits is exempt from taxation upto the extent of 1 lakh,so a person in the highest tax bracket can save over Rs 30000/- but the interest from these deposits are fully taxable.