A tax saving fixed deposit is a financial product that is used to avail tax benefits as per IT Act 80 (C). Like any other financial instrument, it comes with merits and limits but overall serves as a great investment tool. Most financial experts recommend including it in your tax investment portfolio.
What are the benefits of this product and why should you choose it? There are two advantages of Tax saving fixed deposits . The first advantage for users is that they can receive tax benefit on their investment based on the tax bracket they fall under. In addition, they earn interest on the investment as well. Though the interest rate varies with each year, the total return on this can range from 18 to 39 percent, based on the combination of tax bracket and interest rate. When added up, it results in a considerable amount of returns.
While the investment range can vary from Rs.100 to Rs.1,00,000, most people choose to invest the amount applicable to their tax bracket. It should be noted, though, that the interest on this investment is taxable. While that may be a disadvantage, balancing it is the fact that you can choose to earn quarterly, monthly or annual interest which can then be re-invested for compounded interest. It is important to understand your investment strategy clearly in order to make the right use of this customization.
You must consider the limitations of this product too. The lock-in period for tax saving fixed deposit is five years. When you compare it with the lock in period for tax saving mutual funds, which is three years, you might not want to invest. These FDs, though, have a unique advantage over mutual funds, which is safety. Mutual funds can be affected by any major economic incidences in the market. From a market crash, recession to bully period, your returns are not assured. At times, it is possible that you may get no returns other than just saving on tax. It is also possible that the value of your investment is considerably depreciated due to lowered NAV. Overall, diversifying your investment portfolio will ensure that you can retain stability.
Another limitation that you should consider is liquidity. A drawback to this is the fact that you cannot get a loan against a tax saving fixed deposit. While this affects your financial state, many financial experts suggest that you diversify your tax investment across all financial instruments, including FDs. This will allow you to enjoy higher liquidity over a period of time.
In the long run, a tax saving fixed deposit offers secure forms of tax investment. You can earn interest and avail tax benefit too. As an investment designed to save taxes, it is efficient and easy to use. As most banks, by and large, offer a similar rate of interest, it is easy for you to find a financial partner for the same. However, it is also best to make sure that you use other tax saving instruments as well.