"The amount invested in a fixed deposit (FD) with a maturity of five years or more qualifies for deduction under Section 80C. Interest received on such FDs is charged to tax in the hands of the investor. Since many banks have substantially reduced the rates of interest on FDs, the net return on investment after taxes is inadequate. Therefore, interest accruing on FDs up to reasonable threshold limit should be exempted from income tax," said Naveen Wadhwa, DGM at Taxmann.
India's biggest bank, SBI, for example pays an interest rate of 6 per cent on five-year tax saving bank fixed deposits. Senior citizens get higher 6.5 per cent interest rate. Interest earned in income-tax saving FDs is taxable according to the investor's tax bracket.
Tax-saving fixed deposits have a lock-in period of five years. No premature withdrawals or loans are allowed. Interest on income tax-saving deposits is payable on a monthly or quarterly basis. The interest amount earned can be also reinvested, if the investor wants so.
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