tax on fixed deposit

Is 5-Year Fixed Deposit Tax-Free?

Are you willing to invest for the long term but unable to find the right option?  Here is a view of how to invest while deriving maximum benefit. Fixed Deposits are the most commonly opted investment instrument by all. Investors familiar with other asset classes like mutual funds and equities also invest a certain portion of their portfolio in fixed deposits to have a proportion earning fixed income. Also, the fixed income proportion creates a cushion against the market-linked assets of the portfolio.

Fixed deposits and their tax implications

Fixed deposits are risk-free taxable instruments. Any interest earning beyond the limit of Rs 40,000 (per Interim Budget, 2019) is taxable at 10% Tax Deducted at Source (TDS). Though it is taxable, still there are various maturity options that come with an extra advantage – that of a 5-year fixed deposit. If you are looking for a long-term investment with a fixed rate of return, you can opt for 5-year FD which gives tax exemption up to Rs. 1,50,000 under Section 80 C under the Income Tax Act, 1961.

You get a tax deduction of the same amount as the principal (up to Rs 1,50,000) from your taxable income in the year of investment. Since there are no allowances of premature withdrawals or loans against these Tax-saving fixed deposits, the entire interest component can be considered for tax calculation on maturity. The final interest component earned on maturity is disclosed under the “income from other sources” head and is liable for tax per the taxable bracket of the holder.

You can open a tax saving fixed deposit jointly as well. However, the tax saving incentive will only be for the first holder of the deposit.

You can find FDs offered by all the financial institutions, but the only differences among the institutions might be of the rate of interest. Bajaj Finance is one of the leading financial institution offering you the best deal of interest rate up to 8.75% which is one among the highest in the industry. An additional 0.35% is offered to senior citizens. Also, an additional benefit of 0.25% is provided on every renewal.

Earning higher returns on fixed deposits

Using the discipline of making multiply fixed deposits at regular intervals of time can render you regular income periodically from high-interest rates like that of Bajaj Finance FD. This strategy of laddering can be combined with a cumulative option for fixed deposits. This combination can earn handsome returns and build a sizeable corpus over a period of time.

Cumulative option means that the interest component of the fixed deposit will be reinvested with the principal and will not be paid out in the interim. This increases the effective rate of interest. 

A 5-year fixed deposit is not 100% tax-free instrument as it just gives you an exemption of Rs. 1,50,000. However, it is an effective tool to earn high returns with a disciplined approach and save taxes. Banks offer these 5-year tax-Free fixed deposits. Bajaj Finance FDs offer high rates of interest, and you can earn handsome returns by investing a minimum sum of Rs 25,000. Investors with a high-risk appetite might follow the dictum “higher risk, higher return”, whereas most risk-averse investors prefer not to take risks and preserve their wealth following the adage of ” No risk, fixed returns”.

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