July 14, 2024
Choose the Best Tax Saving Instrument for You

As announced in the Budget 2017, the tax is liable on income which exceeds the threshold of INR 3 lakhs. It comes as a relief for people under this income bracket. Earlier, the threshold was set at INR 2.5 lakhs. Thus, there has been an increase of INR 50,000.

However, there are many individuals whose income surpasses the INR 3 lakhs mark. Most of these look forward to saving tax. It is possible that if you are reading this blog, you are looking for a way out too. However, you must know that there are legitimate ways to save tax. There are savings instruments available which not only help you to save tax but also enhance your savings. If you are looking to invest with a view of saving on tax, there are various investment avenues that are available for you. These will help you save tax and grow your wealth.

Choose the Best Tax Saving Instrument for You

  1. Tax Saving Fixed Deposit:

Tax saving fixed deposit helps you to get fixed returns coupled with benefits of tax savings. When it comes to the best tax saving investment, it is one of the most attractive options. Tax saving FDs are little different from the usual ones. Over here, the minimum lock-in period is 5 years. You can invest money in the range of INR 1 to INR 1.5 lakhs (max.) per year. The amount that you invest is eligible for tax deduction, courtesy of Section 80C of the IT Act. However, the interest earned is taxable, and if you have a joint saving fixed deposit account, then only the first account holder is entitled to receive tax benefits.
When we talk about assured returns on investment, FD is one of the most sought after investment option in India. Fixed Deposit involves depositing of money for a fixed period which is pre-agreed and on the completion of the tenure, you receive the amount that you invested, plus the interest that was accumulated on the amount.

Fixed Deposit is resorted to by many investors majorly because of safety and security of investment. There are varieties of Fixed Deposit schemes that are available in the market today, each one of them is meant for a specific purpose based on need and suitability. Before understanding the ways to avoid tax deduction, it is essential that we understand the types of Fixed Deposits. Here are the types of Fixed Deposits:

Regular Fixed Deposit: Under this type of FD, a tenure is fixed for a period of 1-5 years. The rate of interest is predetermined and the investor can select the tenure based on their needs.

Special Fixed Deposit: A special tenure Fixed Deposit schemes involves special tenure such as 333, 555, 666 days. Under the special FD, the rate of interest is generally high. Such FDs are offered mainly during the festive period.

Now having understood the types of FDs, there are several points that you must consider as well:

  • Interest calculation
  • Interest payout
  • Penalty

Having considered these points, let us move on to understanding tax deduction on FD interest. The interest that your Fixed Deposit investment accumulates is taxable under “income from other sources”. Under 80C of Income Tax Act, the amount invested is exempted from tax but the interest earned is not. Thus, if the interest earned on a Fixed Deposit exceeds the INR 10,000 mark in a financial year that TDS will be applied at 10%.

Keeping that in mind, here is how you save TDS on Fixed Deposits:

Submitting form 15G/15H: If an investor submits the form 15G, stating that he does not have any taxable income, the bank will not deduct TDS from the interest that has been earned on Fixed Deposit. Senior Citizens are required to fill 15H.

Distribute FD investment: The best and the most sought after way for saving tax is through investing in different sources. Splitting your investment in separate financial institution ensures that your interest earnings do not exceed INR 10,000.

Manage your FD: You can easily save TDS if you systematically plan and manage your FD. It is essential that you select the right time.

Split the FD: Splitting a Fixed Deposit is one of the wisest options when looking forward to exemption from tax. Under this scenario, a depositor must invest into two accounts – one will be his/her personal account and the other will be an HUF account. The benefit of investing your funds in such a way is that they will be treated separately. So, if you have an HUF identity, then you have the option of splitting your Fixed Deposit.

Here were a few ways through which you can save TDS from being charged on the interest. Fixed Deposit is one of the best options when it comes to secured returns. However, it is important to do your research before you choose any financial institution.

FD is one of the most sought

  • Public Provident Fund:

When it comes to the best tax saving instrument which offers maximum safety, Public Provident Fund (PPF) is a go-to-option. Similar to tax saving fixed deposit, even PPF is entitled to receive tax benefits under Section 80C of the IT Act. The most attractive part about this investment avenue is that even the interest paid is tax-free. PPF falls under Exempt, Exempt, Exempt (EEE) which means that there won’t be any tax at any point when investing be it on returns or maturity.

  • Employee Provident Fund:

It is one of the most popular instruments among the employees working in the organised sector. This tax saving instrument is the most sought after option for them. It is a rule that a 12% deduction in the salary of each employee is done and directed towards Employee Provident Fund. The employer has to contribute in the same way and sum that is invested in EPF is tax deductible under Section 80C of IT Act. However, the key aspect which most people are not aware of in EPF is that you can even invest more than the prescribed 12% which is also applicable for a tax deduction.

  • National Saving Certificate:

An investment option which is quite similar to tax saving fixed deposit. However, the significant difference between the two is that National Saving Certificate (NSC) offers less return as compared to Fixed Deposit. NSC usually comes with a lock-in period of 5-10 years. It is one of the safest investment avenues as the government of India safeguards the money. Similar to the options above, NSC is also applicable for tax deduction under Section 80C.

  • Health Insurance

The premiums that you pay towards insurance policy are eligible for tax deduction under Section 80D of IT Act. The benefit is not just available to an individual but also to his family for which he/she pays the premium. Apart from this, the premium which is paid towards medical insurance or critical illness also qualifies for tax benefits. An investor in this policy can claim a tax deduction of up to INR 40,000.

These are few of the safest options with regards to tax saving. However, fixed deposit tops it all regarding safety and returns.

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