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How Tax-Saving FDs Help You Save Taxes Under Section 80C?
Effective tax planning is crucial for managing personal finances wisely. One smart way to save on taxes is to invest in tax-saving fixed deposits (FDs).
Thanks to Section 80C of the Income Tax Act, you can claim deductions on your taxable income by putting your money into these special FDs.
So, let us discover how a tax saving FD works and learn some tips on how to make the most of your investments.
Tax-Saving FDs: A brief overview
As the name suggests, tax-saving FDs are a type of Fixed Deposit that helps you minimise your tax liabilities by claiming deductions under Section 80C of the Income Tax Act, 1961.
These special Fixed Deposits, also known as Tax Saver Fixed Deposits, come with a 5-year tenure which means that you will be required to keep your money locked in for 5 years.
Another important thing to note is that the interest you earn on tax-saving FDs will be taxable. So be sure to factor that in when planning your finances.
Reducing Your Tax Burden with Tax-Saving FDs
As per Section 80C of the Income Tax Act, 1961, you can claim a tax deduction of up to ₹1.5 lakh per year by investing in a Tax Saver Fixed Deposit.
This tax deduction is available to individuals and HUFs (Hindu Undivided Families) who invest in tax-saving FDs with a scheduled bank.
The tax savings can be substantial, depending on your tax slab. Let us understand with an example.
Example:
Rahul has a taxable income of ₹8 lakhs per annum. He wants to save taxes and invest in a Tax Saver FD.
He decides to invest ₹1.5 lakhs in a Tax-Saving Fixed Deposit (FD) which earns an FD interest rate of 6% per annum. The lock-in period is 5 years and Rahul falls under the 20% tax slab.
By making this investment, Rahul becomes eligible to claim a tax deduction under Section 80C.
But that is not all. Over the 5-year lock-in period, Rahul earns an interest of ₹45,000 on his investment. So, not only does he save ₹30,000 in taxes but he also earns a substantial interest amount.
Rahul’s story shows us how investing in a Tax-Saving FD can be a smart move. It helps reduce tax liability, earns interest and grows wealth over time.
Other benefits of investing in Tax-Saving FDs
- Guaranteed returns: One of the best things about tax-saving FDs is that they offer fixed returns which means you can count on earning a fixed FD interest rate and watching your money grow steadily over time.
- Disciplined savings: The lock-in period of tax-saving FDs is like a blessing in disguise. It helps you stay disciplined with your savings and avoid dipping into your funds prematurely so you can watch your money grow over time without any interruptions.
- Low-risk: Tax Saver FDs are low-risk which means you do not have to worry about losing your hard-earned money. This ensures that your investment remains safe and sound, earning interest and growing steadily over time.
- Flexibility: With tax-saving FDs, you get to decide how much you want to invest, when you want to compound your interest and even earn extra interest if you are a senior citizen.
Key takeaways
Tax-saving FDs are a great way to save taxes under Section 80C. Not only do you get to claim a tax deduction but you also earn guaranteed returns, stay disciplined with your savings and avoid risking your savings.
Plus, with the certainty of guaranteed returns, you can stop worrying, knowing your money is growing steadily over time.
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