A tax-saving bank FD is not a tax-free investment

In the last quarter of financial year 2018-19, people — especially salaried people — are in a hurry to make investments to save taxes, as the deadline is almost over to submit the proof of tax-saving investments to reduce the TDS outgo from the salaries of the next few months.

But tax-saving investments are long-term commitments. So, you should not make any wrong investment in a hurry, just to reduce your TDS or taxes, which you may get back as a refund after filing income tax return (ITR), if excess taxes are cut. Instead, you should take out some time to first plan your investments so that you may achieve specific long-term financial goals through the tax-saving investments.

Even if you fail to make proper financial planning, at least make sure that the returns and maturity value of the investment should be tax free along with the tax benefits on the amount of investment. Otherwise, in case the returns and maturity values are taxable, you would end up delaying your tax liability, which would be a costly step as you may enter a higher tax bracket in the year in which your investment matures.

So, you should find out tax-saving investment avenues that give you tax benefits on investment amounts, returns or interest which are tax free and should generate tax-free maturity amounts as well, that is the investment should fall under the exempt, exempt, exempt (EEE) category.

However, to save time and effort, if you visit your nearest bank branch and invest in 5-year fixed deposits (FDs), you may get deductions up to Rs 1,50,000 on the investment amount, but will have to pay tax on the interest as the FD interest is fully taxable. Moreover, the bank will start deducting TDS from the interest amounts as soon as it crosses Rs 10,000.

So, by investing in a tax-saving bank FD, you may get the 80C benefit up to Rs 1,50,000 on the amount you have invested, but eventually you have to pay tax on the amount of interest you earn. However, the government has decided to give some relief to senior citizens by making interest on FDs up to Rs 50,000 tax-free in a financial year for them.

If you want to invest in completely tax-free EEE category, you have to invest in instruments like PPF, Sukanya Samriddhi Yojana (SSY), insurance, ULIPs etc.