Meet Reena, Sheena, and Raj, three friends who were keen on finding ways to save on taxes while growing their savings. They discovered a powerful tool – Fixed Deposits (FDs) – that helped them achieve both goals simultaneously. Explored here is how they utilised FDs to save on taxes while enjoying the numerous benefits that come with these investments.
What is an FD?
An FD or fixed deposit is a secure financial tool where you can deposit a lumpsum amount with the bank for a predefined time period called tenure. In return, you get a fixed rate on your investment periodically, which can be annual, half-yearly, quarterly, or monthly, based on your preference. The most compelling aspect of FDs is that your principal amount remains entirely safe and is returned to you in full when the FD matures. FDs are known for their stability, predictable returns, and suitability for risk-averse individuals looking to grow their savings with peace of mind. However, it is important to note that the interest earned on FDs is subject to taxation, and there may be penalties for premature withdrawals, making it essential to plan your investments carefully. Note that by using an online FD calculator, you can make a better decision.
Benefits of Investing Funds in FD –
FDs provide financial stability by offering a fixed interest rate throughout the investment tenure. This infers you can depend on regular interest constituents, which may be particularly essential for individuals eyeing a steady income source.
FDs are looked upon as one of the safest options. When you put money in FD, your money is placed with an institution that is backed by regulatory authorities. This infers that even in uncertain times, your principal constituent is safe, and you can anticipate getting the complete amount at maturity.
Higher interest rates
FDs typically offer higher interest rates compared to regular savings accounts. The interest rate on an FD is determined at the time of investment, and it remains constant throughout the chosen tenure. This higher interest rate helps your money grow faster.
Investing in Tax-Saver FDs can significantly reduce your tax liability. As per Section 80 C, you can get a deduction of as high as Rs 1.50 lakh on the invested fund in such FDs. This infers you can reduce your taxable income and even pay less taxes.
Loan against FD
FDs offer liquidity even during the lock-in period. If you require funds urgently, you can avail a loan against your FD, using it as collateral. This ensures you have access to cash when you need it, without breaking your FD prematurely.
FDs offer flexibility in choosing the investment tenure. You can select a tenure that aligns with your financial goals, whether it’s a short-term investment of a few months or a long-term investment that spans several years.
FDs provide predictable and fixed returns. The interest rate agreed upon at the time of investment remains unchanged throughout the tenure, regardless of fluctuations in market interest rates. This predictability is beneficial for those who prefer stable returns.
Senior citizen FDs
Special FD schemes designed for senior citizens offer even higher interest rates than regular FDs. This is a rewarding option for retirees looking to maximise their income in retirement.
No market risk
Unlike investments in stocks or mutual funds, FDs are not subject to market volatility. Your returns are predetermined, offering a sense of security, especially during uncertain economic times.
If you rely on investment income for your monthly expenses, FDs can be structured to provide a regular source of income. You can choose to receive interest payouts at regular intervals, such as monthly or quarterly.
Opening an FD account is a straightforward process. You don’t need an in-depth understanding of financial markets or complex investment strategies. This accessibility makes FDs an ideal choice for a wide range of investors.
Many banks and financial institutions offer auto-renewal options for FDs. This means that once your FD matures, the principal amount along with the interest can be reinvested automatically for the same tenure, ensuring your money continues to grow.
Although FDs have a lock-in period, they offer relatively easy liquidity compared to other long-term investments. In case of financial emergencies, you can prematurely withdraw your FD, albeit with a minor penalty.
FDs provide a nomination facility, allowing you to specify a beneficiary who will receive the FD amount in case of your untimely demise. This ensures that your loved ones are financially secure and can access the funds without complications.
Tax-Saver FDs are tailor-made for tax savings. By investing in such FDs, you can get deductions of up to Rs 1.50 lakh as per Section 80 C, lowering your taxable income. This converts to considerable tax savings, particularly for those falling into the higher tax slab.
Saving Tax with FD investment
To save on taxes, Reena, Sheena, and Raj decided to invest in tax-saver FDs, also known as 5-year FDs. Such FDs provide tax deductions as per Section 80 C, lowering their taxable income by as high as Rs 1.50 lakh. For example, if Reena invested in a tax-saver fixed deposit amount of Rs 2 lakh, she could claim tax deductions equaling Rs 1.50 lakh.
The three friends also used online FD calculators and tax calculator to determine the exact amount they could save on taxes. These online tools helped them make informed decisions about their investments, ensuring maximum tax savings.
Reena, Sheena, and Raj not only secured their financial future by investing in FDs but also saved a substantial amount on taxes. They understood that by selecting the correct investment products and using tax-saving products like FDs, they can make the most out of both verticals i.e., growing their wealth while lowering their tax burden.
In the case you are looking at doing the same, consider bank FDs as a tax-efficient and reliable investment product and do not forget to utilise online FD calculators. Start your journey towards financial security and tax savings today!