"The avoidance of taxes is the only intellectual pursuit that carries any reward." - John Maynard Keynes
Yes, avoiding taxes brings meaning to your life. John Maynard Keynes, sure knew what he was talking about. Now, fixed deposits are a highly popular investment, for you and several of our citizens. Investing in a fixed deposit, not only brings you decent risk free returns, you also have an opportunity to save tax. But there’s a small problem….to avail tax benefits on fixed deposits, you need to study the tax benefits on FD’s. Too busy to do so…Well, get ready to pay your hard earned money, in tax.
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If you want to save taxes on fixed deposits….there is a powerful friend, who can help you do the job. Yes, the Government has given you the benefit of Section 80 C deductions, on your investment in a fixed deposit. But there’s a catch….You get the tax benefit, only if you invest in a tax saving fixed deposit. If you invest money in an ordinary FD, there is no tax benefit.
What is this tax saving fixed deposit? You get a tax deduction under Section 80 C of the income tax act, up to INR 1.5 Lakhs in a financial year, if you invest your money in a tax saving fixed deposit. The tax saving fixed deposit also called tax saver FD, has a tenure of 5 years. What does this mean? You cannot withdraw from the tax saver FD, until maturity. Your money is locked for a time period of 5 years.
Remember: You get this tax benefit only on tax saver FD. You cannot avail a loan against tax saver FD.
What about the interest you earn on the tax saver FD? Unfortunately, the interest you earn is taxed, just like any ordinary fixed deposit. The interest you earn is added to your taxable salary and you are taxed, as per the income tax slab, you fall under.
Find tax deducted at source, popularly known as TDS, too difficult to understand? Well it’s not. It’s just tax on the interest earned on your fixed deposit. Your bank would cut TDS, if the interest you earn on your fixed deposit, is more than INR 10,000 in a financial year. The TDS is cut at the rate of 10%, on the interest you earn on the FD. Still not clear…..Check out this example.
You have invested INR 3 Lakhs in a fixed deposit, for a time period of 3 years. The bank pays an interest of 7.5% a year. You earn INR 22,500 in interest for the first year (3 Lakhs @ 7.5%). The bank will now deduct TDS at the rate of 10%, on the interest you have earned from the FD (INR 22,500 @ 10%). The remaining interest income of INR 20,250 is reinvested.
Remember: The TDS collected, is deposited on your behalf with the tax authority. If you do not provide your PAN, then TDS will be deducted at 20%.
Now to the big question….How to avoid paying the TDS?
Tax evasion is a crime. Tax avoidance is not. You are considered wise, if you study the tax rules and save your hard earned money from tax. A rupee saved is a rupee earned. Save your taxes and gallop on the path to riches.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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