A tax saving FD is a fixed deposit account that guarantees interest returns. It works the same as regular fixed deposits except for two things. First, unlike a regular FD, the account-holder can claim a tax deduction of up to Rs 1.5 lakh annually under Section 80C of the IT Act.
Second, to earn interest returns on maturity, there is a lock-in period of 5 years.
Both these conditions lead to investors creating a corpus shielded from market volatilities for a significant duration. But this is not it! The interest earned through this instrument adds a series of benefits to your investment portfolio.
The Impact of Tax Saving FD Interest Rates on Your Investment Portfolio
1. Provides a Higher Yield Than Promised
The interest returns earned from a tax saver FD over the minimum tenure of 5 years are compounded to provide you with a higher yield.
For example, a tax saver FD with a simple interest of 6% may provide an effective annualised yield of 7% or more after 5 years due to the magic of compounding.
Sure, this is also true for a regular fixed deposit created for over 1 year.
2. Returns are Higher Than Savings Accounts
Tax saving FD interest rates are substantially higher than savings accounts. In fact, FD interest returns are hitting their peak, which makes this instrument even more attractive to investors. So, if you don’t require high liquidity in your savings account, transfer the additional funds into a tax saving FD.
Moreover, under Section 80C of the Income Tax Act, an individual can claim a deduction of up to Rs. 1.5 lakhs per annum on the principal amount invested in tax-saver FDs. This will increase the total value of your investment portfolio.
Final Thoughts
Investing in tax-saving fixed deposits awards you a tax deduction of up to Rs. 1.5 lakhs in a year. Also, these FDs don’t allow for premature withdrawals unless there is a life-threatening emergency or if the FD holder passes away.
In the latter scenario, the tax-saving FD is liquidated, and the balance (principal + interest earned thus far) is handed over to the nominee appointed.
If you are looking to earn high yet stable tax-free returns to bolster your investment portfolio, open a tax saver fixed deposit account.
