Fixed deposits (FDs) and savings accounts are some of the most popular investment options for individuals looking to save money while earning interest. In addition to their primary benefit of offering a safe and reliable income, both FDs and savings accounts also provide tax-saving opportunities. Understanding how to claim tax benefits on these investments can help you make the most of your savings and reduce your tax liabilities.

In this blog post, we’ll explain how to claim tax benefits on fixed deposits and savings accounts, the key sections under which you can avail these benefits, and some important tips to maximize your savings.

1. Tax Benefits on Fixed Deposits (FDs)

Fixed deposits are a favorite among conservative investors because they provide guaranteed returns over a fixed tenure. Besides being a secure investment, FDs also come with tax benefits.

Tax Deduction on Fixed Deposits under Section 80C

Under Section 80C of the Income Tax Act, you can claim a tax deduction of up to ₹1.5 lakh for investments made in tax-saving FDs. However, not all fixed deposits are eligible for tax benefits; only 5-year fixed deposits with banks and financial institutions are eligible for tax deduction.

• Eligibility: To claim a tax deduction, the FD must be held for a minimum of 5 years.
• Interest Earnings on Tax-Saving FDs: While you can claim a deduction for the amount invested in tax-saving FDs, the interest earned on these FDs is taxable. The interest is added to your total income and taxed according to your applicable tax slab.

Example: If you invest ₹1.5 lakh in a 5-year FD, you can claim a tax deduction of ₹1.5 lakh under Section 80C. However, the interest earned on this FD will be subject to tax.

Tax on Interest Earned from Fixed Deposits

The interest earned on FDs, whether in a regular FD or a tax-saving FD, is taxable. This interest income is added to your overall income and taxed as per your income tax slab.

• TDS on FD Interest: If the interest income on a fixed deposit exceeds ₹40,000 in a financial year (₹50,000 for senior citizens), the bank will deduct TDS (Tax Deducted at Source) at the rate of 10%. However, if your total income is below the taxable limit, you can file for a refund by submitting Form 15G or 15H (for senior citizens).
• Interest Calculation: The interest on FDs is either credited monthly, quarterly, or annually. Ensure that you account for the interest income each year to avoid any surprises during tax filing.

2. Tax Benefits on Savings Accounts

Savings accounts, though offering lower interest rates than fixed deposits, are a popular choice for individuals looking for liquidity and safety. However, there are certain tax benefits associated with savings accounts as well.

Tax Deduction on Interest Earned from Savings Accounts under Section 80TTA

Under Section 80TTA of the Income Tax Act, you can claim a deduction of up to ₹10,000 on the interest earned from savings accounts in a financial year. This applies to interest earned from savings accounts with banks, post offices, and co-operative banks.

• Eligibility: The deduction of ₹10,000 applies to individual taxpayers and Hindu Undivided Families (HUFs).
• Non-Applicability for Senior Citizens: This deduction is not available to senior citizens (above 60 years of age). Instead, senior citizens can claim a higher deduction of ₹50,000 under Section 80TTB for interest earned on savings accounts, fixed deposits, and recurring deposits.

Example: If you earn ₹12,000 interest from your savings account in a financial year, you can claim a tax deduction of ₹10,000 under Section 80TTA. The remaining ₹2,000 will be added to your total income and taxed according to your income tax slab.

Interest Taxable on Savings Accounts

Just like fixed deposits, the interest earned on savings accounts is subject to tax. However, the tax benefits under Section 80TTA allow you to reduce your tax liability on the interest income, provided it does not exceed the ₹10,000 threshold.

3. Tax Benefits for Senior Citizens

For senior citizens, there is an enhanced tax benefit under Section 80TTB. Senior citizens can claim up to ₹50,000 as a deduction for interest earned on savings accounts, fixed deposits, and recurring deposits. This deduction is available irrespective of whether the interest is earned from a single or multiple sources.

Tax Exemption for Senior Citizens on Fixed Deposits and Savings Accounts

• Savings Accounts: Senior citizens can claim a deduction of up to ₹50,000 on the interest earned from savings accounts.
• Fixed Deposits: Similarly, senior citizens can claim up to ₹50,000 as a tax deduction on the interest earned from fixed deposits.

This special provision helps senior citizens maximize their savings and reduce their overall tax burden.

4. Key Considerations While Claiming Tax Benefits

• Tax Deducted at Source (TDS): Banks deduct TDS on FD interest exceeding ₹40,000 (₹50,000 for senior citizens). Make sure to submit Form 15G or 15H if you wish to avoid TDS deductions.
• Interest Income in Tax Return: Even though tax is deducted at source, you must report the interest income from FDs and savings accounts in your income tax return.
• Eligibility for Section 80C and 80TTA: Ensure you meet the eligibility criteria for claiming deductions under Section 80C (for tax-saving FDs) and Section 80TTA (for savings account interest) to maximize your tax benefits.

5. Tips to Maximize Tax Benefits on Fixed Deposits and Savings Accounts

• Choose 5-Year Fixed Deposits: To avail tax benefits under Section 80C, ensure that your fixed deposit has a tenure of 5 years. This allows you to claim the maximum deduction.
• Utilize the Full ₹10,000 Deduction on Savings Accounts: Take advantage of the Section 80TTA deduction to reduce your taxable income if you earn interest from your savings account.
• Invest Smartly in Fixed Deposits: While fixed deposits offer tax-saving benefits, consider the interest income and its taxability. Balance your portfolio with other tax-saving instruments for better returns.
• For Senior Citizens, Claim ₹50,000 Deduction: If you’re a senior citizen, be sure to claim the higher ₹50,000 deduction available under Section 80TTB.

Conclusion

Fixed deposits and savings accounts are reliable, low-risk investment options that can help you earn steady income while providing valuable tax-saving opportunities. By understanding the various tax exemptions and deductions available, such as Section 80C for tax-saving FDs and Section 80TTA for savings accounts, you can optimize your investments and reduce your tax burden.