Tax Exemption Options

Tax Exemption Options

Following table give you more idea about income tax exemption plans

Section	Product To Invest	Amount To Invest	Other Details
80C	NSC, Bank Deposits and Post office time deposit, EPF, PPF, ELSS, Life insurance plans, Pension plans.	Cannot exceed Rs.1 lakh	Mandatory requirements - Payment has to be made before 31 March. Who can avail the deduction - Individuals and HUF (both resident and non-resident).
80CCC	Pension plans of life insurers.	Limit of Section 80C (up to Rs.1 lakh)	Mandatory requirements - Payment has to be made before 31 March. Who can avail the deduction – Individuals
80D	Medical insurance policies taken for self, spouse, dependent parents or children, or any member of HUF.	Up to Rs.15,000; senior citizens can claim up to Rs.20,000	Mandatory requirements - Premium should be paid through a cheque out of income chargeable to tax Who can avail the deduction - Individuals and HUF.
80DD	Expenses on the medical treatment of a dependent who is a person with a disability.	Up to Rs.50,000, or up to Rs.75,000 if the dependent is a person with severe disability.	Mandatory requirements - Certification by a medical authority Who can avail the deduction - Resident individual or HUF.

               

Section	Product To Invest	Amount To Invest	Other Details
80DDB	Expenses on the medical treatment of a specified disease (cancer, AIDS, neurological diseases, chronic renal failure and more)	Rs.40,000 (if the person treated upon is less than 65 years of age),or Rs 60,000 (if the age of the person treated is 65 years or more)	Mandatory requirements - Certificate in Form No.10-l to be submitted along with the income tax is available if the amount is actually paid for treatment. Who can avail the deduction - Resident individual or HUF.
80E	Payment of interest on loan taken for higher studies.	Deduction available on the total interest portion of education loan, the Principal repayment gets no tax advantage	Mandatory requirements - Deduction is available in the year in which repayment starts and only for eight immediately succeeding assessment years. Who can avail the deduction – Individual
80G	Donations to certain funds and charitable institutions.	50 or 100 % deduction on the entire donated amount or 50 or 100 per cent deduction subject to 10 % of gross total income.	Mandatory requirements - Not applicable
80GG	Rent paid for residential purpose	Excess of actual rent paid over 10 % of GTI, or 25 % of GTI, or Rs.2,000 per month, whichever is the lowest.	Mandatory requirements - Should not be getting house rent allowance. Actual rent paid is in excess of 10% of the total income Who can avail the deduction - Self-employed or salaried.
80U	Expenses incurred on self, if disabled	Rs.50,000 for a person with disability, Rs.75,000 for a person with severe disability (disability of over 80 %)	Mandatory requirements - Certification by a medical authority to be furnished along with the income tax return form. Who can avail the deduction-Resident individuals

EPF BENEFITS

EPF BENEFITS

The scheme
This monthly pension comes to you, courtesy the Employees’ Pension Scheme (EPS), 1995. The EPS is run by the EPFO as a subset of the EPF, which is mandatory for establishments with more than 20 employees. Every month, 12 per cent of your basic salary and dearness allowance (DA) goes into the EPF. Your employer contributes an identical amount. If the sum of your basic and DA is up to Rs 6,500, you have no choice but to contribute to your EPF; the same goes for your company. But if your basic and DA exceed Rs 6,500, you can opt out. 

Most of the money your employer and you put in goes towards building your EPF kitty, on which you are currently earning 8.5 per cent. A part of it, however, goes towards funding your pension. More specifically, of every Rs 12 your employer contributes, Rs 8.33 goes into the EPS; the government chips in another Rs 1.16. When you turn 58, you start getting a pension.

Senior Citizens Savings Scheme

Senior Citizens Savings Scheme 2004

   Salient Features of the Scheme 

Tenure of the Scheme	5 years, which can be extended by 3 more years
Rate of interest	9% (simple interest)
Frequency of Computing interest	Quarterly
Tax aspects	Interest is fully taxable
Investment to be in multiples of	Rs.1000/-
Maximum investment limit	Rs.15 lakhs
Minimum eligible age	60 years (55 years for those who have retired under a voluntary or a special voluntary scheme provided investment is made within 1 month of date of receipt of retirement benefits for retired personnel of Defense Services (excluding Civilian Defense Employees) - no age limit.
Facility of premature withdrawals	Available after 1 year of holding but with penalty
Transferability feature	Not available
Tradability	Not available
Nomination Facility	Available
Mode of Holding	Generally single, Joint mode is permitted but only spouses will be allowed to open accounts jointly with beneficiaries.

Who can apply
The scheme is available for citizens above 60 years of age; however a provision has been put in place for individuals who have crossed 55 years of age. Such individuals may invest subject to the conditions that,

·           The person has retired under a voluntary retirement scheme or a special voluntary retirement scheme on the date of making the investment,

·           The investment is made within three months of the date of retirement,

·           And a certificate from the employer, indicating the fact of retirement, retirement benefits, along with period of such employment with the employer, is attached with the application form.

Non-Resident Indians and Hindu Undivided Families are not permitted to invest in the scheme.

Investment Limits
Investments can be made in any post-office by opening an account. Only one deposit can be made in each account; the deposit amount shall be a multiple of Rs.1,000 and should not exceed Rs.1,500,000.
A depositor can operate more than one account subject to the condition that all the deposits taken together don't exceed the specified amount i.e. Rs.1, 500,000. Also more than one account shall not be opened in the same post-office during a calendar month.

·           Interest rate - The scheme will offer an interest of 9 per cent per annum. The same will be payable on 31st March, 30th June, 30th September and 31st December each year.

·           Mode of holding - The depositor can hold an account either individually or jointly with his/ her spouse.

·           Nomination - Nomination facility has been provided under the scheme. In the event of death of the depositor, the amount due shall be paid to the nominee. Nomination facility is also available incase of joint accounts.

·           Maturity - The scheme has a tenure of 5 years. The account can be extended for a 3 year period by making an application.

·           Withdrawals - Investors will be permitted to prematurely liquidate their investments at any time after the expiry of 1 year from the date of opening of the account subject to the following conditions,

·           In case the account is closed after the expiry of 1 year but before the expiry of 2 years from the date of opening of the account, an amount equal to 1.5% of the deposit shall be deducted.

·           In case the account is closed on or after the expiry of 2 years from the date of opening of the account, an amount equal to 1% of the deposit shall be deducted.

·           Tax benefits - The interest income from the scheme is fully taxable.

Transfer of Account
The account can be transferred from one post-office to another.

Post Office Recurring Deposit Scheme

Post Office Recurring Deposit Scheme (RD)

Duration: P. O. Recurring Deposit has an investment period of 5 years.

Mode of Investment: Single, Joint (Two or more), Minor with parent/guardian.

Investment: Amount repayable for an account of Rs. 10 denomination

Rs. 728.90 after 5 years.  Min Amount  Rs. 10/-   Max Amount     No Limit
Denominations   Rs. 5/-

Returns: P. O. Monthly Income Scheme provides an interest rate of  7.5% per quarter.

Advantages:

·         Facility is there at the time of opening the account or anytime during the tenure of the account.

·         Is permitted if deposit is more than one year old. The interest rate applicable will be that which is prevailing at that time.

·         The certificate is to be discharged at the back.

·         A pass book is issued at the time of opening the account. If there is a loss, theft or the passbook is mutilated, a duplicate is issued on a charge.

 
Tax benefits can be availed under section 80L. No Tax benefits are provided under section 88

Post Office Monthly Income Scheme

Post Office Monthly Income Scheme (MIS)

Duration: P. O. Monthly Income Scheme has an maturity period of 6 years.

Mode of Investment: Single, Joint (Two or more), Minor with parent/guardian and Minor who has attained age of 10

Investments:Min Amount Rs. 1,000/- and additional investment in multiples of 1,000/- Max Amount Rs. 3,00,000/- (if Single) or Rs. 6,00,000/- (if held Jointly).

Returns: P. O. Monthly Income Scheme provides an interest rate of 8.0% per annum which is paid monthly

Advantages:

·         Depositor can have more than one account in the same post office or in any other.

·         Facility is there at the time of opening the account or anytime during the tenure of the account.

·         Is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% bonus is also denied.

·         A bonus of 10% is paid at the time of maturity.

·         A Passbook is issued at the time of opening the account. If the passbook is lost, or it is is mutilated, a duplicate is issued on payment of a charge.

·         Tax benefits can be availed under section 80L. No Tax benefits are provided under section 88.

·         A good scheme for the retired to get a fixed income

·         Benefit of a terminal bonus of 10% if the account is maintained till maturity

·         The depositor may open any number of accounts subject to the condition that the total investment in all the accounts not exceed Rs 3.00 and Rs 6.00 lacs if the account are held by single and joint holders respectively.

National Savings Certificate

National Savings Certificate (NSC)

What is National Savings Certificate?
National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961.

Duration: The NSCs have a maturity period of 6 years.

Mode of Investment: Single, Joint (Two or more), HUFs and Minor with parent/guardian and trust can purchase a NSC by applying to the Post Office through a representative or an agent.

Investments: Min Amt.  Rs.100/- and additional investment in multiples of Rs. 100/- Max Amount No Limit

Denominations   Rs. 100/-, 500/-, 1,000/-, 5,000/-, 10,000/-, 50,000/-

Returns: NSC provides an interest rate of 8% which is compounded half yearly. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. A Rs.1000 denomination certificate will increase to Rs. 1601 on completion of 6 years.

Advantages:

• Department of Posts (DOP) in association with NSDL has introduced the facility of holding NSC in dematerialized form
• Tax benefits are available on amounts invested in NSC under section 88.
• Exemption can be claimed under section 80L for interest accrued.
• Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. 
• NSCs can be transferred from one person to another through the post office on the payment of a prescribed fee. They can also be transferred from one post office to another.
• The scheme has the backing of the Government of India so there are no risks associated with your investment.

Kisan Vikas Patra

Kisan Vikas Patra (KVP)

Duration: The NSCs have a maturity period of 8 years & 7 months.

Mode of Investment: Single, Minor with parent/guardian and Joint (Two or more) Any individual or including body corporate can purchase a KVP by applying to the Post Office through a representative or an agent. Payments can be made in cash, cheque or DD or by raising a debit in the savings account held by the purchaser in the Post Office.

Investments: Min Amt.  Rs.100/- and additional investment in multiples of Rs. 100/- Max Amount No Limit
Denominations   Rs. 100/-, 500/-, 1,000/-, 5,000/-, 10,000/-, 50,000/-

Returns: KVP Scheme doubles money in 8 years & 7 months.

Advantages:

• Considering various benefits of dematerialization to investors, Department of Posts (DOP) in association with NSDL has introduced the facility of holding KVP in dematerialized form.
• Facility is available at the time of opening the account or anytime during the tenure of the investment.
• Premature encashment is permitted after 2.5 years from the date of investment. Lower interest accrued, if prematurely withdrawn.
• If the loss is due to theft, fire or the certificate is mutilated, a duplicate certificate is issued after proper verification.
• A good investment instrument for all retired persons who would require the money at a later date and for those who do not have taxable income.

Disadvantage: No Tax benefits are available for investments in this scheme under the Income Tax Act

Index of Industrial Production

Index of Industrial Production (IIP)

The Index of Industrial Production (IIP) compares the growth in the general level of industrial activity in the economy with reference to a comparable base year. In order to capture the structural changes in the industrial sector, the base year of the all-India IIP which was commenced in India in 1937 was revised in 1946, 1951, 1956, 1960, 1970, 1980-81 and 1993-94.  The current series of all-India IIP (base 1993-94) was released in May 1998.

In India, the Central Statistical Organisation (CSO) is responsible for compilation and release of the Index of Industrial Production (IIP). This is a monthly index and is intended to measure changes over time in the volume of industrial production. The current series of IIP is based on 538 individual items clubbed into 283 groups of items. The distribution of these items (item groups) and weights (100) among the three sectors covered by the index is as under:

Sector	No. of Items (Item Groups)	Weight
Mining	64(1)	10.47
Manufacturing	473(281)	79.36
Electricity	1(1)	10.17
Total	538(238)	100

The scope of IIP in India is confined to Mining, Manufacturing and Electricity sectors only. Gas production is included in the Manufacturing sector. Distribution of Gas & water is not covered under the existing series of IIP.

As the IIP is a quantitative index, it is based on the production of items being expressed in physical terms. However, the unit of reporting in respect of certain items like Machinery, Machine Tools, Ship Building etc. is in value terms. The monthly figure of production, in such cases is derived by deflating such value figures by appropriate Wholesale Price Index (WPI) of the concerned categories.

The index is a simple weighted arithmetic mean of production relatives calculated by using Laspeyre’s formula

I=Σ(Wi*Ri)/ΣWi,

Where I is the Index, Ri is the production relative of the i-th item for the month in question and Wi is the weight allotted to it based on Gross Output.

The item-wise indices are vertically aggregated at 2-digit of industrial classification based on weighted average, weights are proportionate to Gross Value Added.

The Quick Estimates of IIP are compiled on the basis of data furnished by the source agencies located in various Ministries/Departments/Subordinate Offices of the Government of India. Index is released within six weeks from the reference month and are subsequently revised in the next and the third month based upon the revised production data furnished by the source agencies.

Index of Industrial Production in India is a fixed base (reference) time index and not a chain index. The main advantage of using a fixed reference time index is the computational ease and availability of data. The major hindrance for compiling a chain index in India is the non-availability of timely data for updation of weights on an annual basis.

Gold Exchange Traded Fund

Gold Exchange Traded Fund (ETF)

Defining Gold: What is Gold - Yellow Metal or Paper?

We have always loved gold! Historically at least 3-4000 years ago gold finds mention. Most people love gold, and India is a huge user of gold - mostly in the form of jewellery. Here we are talking of buying gold - more as an investment rather than usage (jewellery is not an investment asset, it is an usage asset). Gold has to be bought, held and then sold - like any other form of investment. Today you have an option of how to buy and hold gold. Gold is seen as an important part of a personal portfolio - reserve banks of the world also hold it in their portfolio. Does it have a correlation to equities, currencies or other commodities like oil? Is difficult to say and far more difficult to prove. However, as an investment option a small portion of gold - say 10% is what many retail investors have or would like to have in their portfolio. Over the past say 30 years gold would have underperformed bank fixed deposits, but over the past 8-12 months it may have conveniently beaten the equity indices.

There are three ways of buying gold:

Physical gold      Gold ETF (Exchange Traded Fund)     Gold in demat form

Physical gold (Yellow Metal)
The oldest method of buying and storing gold - it has its advantages and disadvantages. The biggest advantage is most of these purchases can be done in cash and thus one`s unaccounted money gets deployed. Here as a customer you go to a jeweler and he sells gold at a price mentioned (displayed) in the shop. The jeweler also buys it back at a later date. However the whole process is a little inefficient, and the transaction cost makes it a little unattractive as an investment option. However it is still perhaps the most common way and popular way of gold investment.

Gold ETFs (Paper)
Gold Exchange Traded funds (ETFs) offer investors an innovative, cost-efficient and secure way to access the gold market. Gold ETF is intended to offer investors a means of participating in the gold bullion market through Stock Exchanges without taking physical delivery of gold.

The investment objective of Gold ETF is to provide returns that closely correspond to the returns provided by domestic price of gold through physical gold.

Gold ETFs offer investors a convenient means to invest in gold without the hassles of storage; also it spares investors of the concerns regarding the quality of gold and also lowers transaction cost.

To buy an ETF from the exchange, you would pay a brokerage - charge of sum percentage depending on your broker, whereas if you buy it at a NFO you would end up paying an entry load.

Gold in demat form
You need to have a brokerage account with a commodity broker - so that you can buy the gold and hold it in demat form. Obviously you can then sell it, hold it, pledge it, like you can do with any other asset.

Which is the best option?
As an investor, we tend to buy physical gold in the form of coins, bars and jewellery as this is the traditional way to invest in gold. You could buy gold in the form of jewellery but if you wish to invest into gold for the long term then buying physical gold may not be an ideal option. Physical gold typically comes with drawbacks like concerns on purity, cost of storage and security. The most authentic source of gold is buying through banks, which certify its authenticity but cost 8-10% more than local jeweler.

If you want gold as an investment, you will most likely be better off with options such as gold funds. Since these funds invest their corpus into gold, they mirror the performance of spot gold. Your holding in these funds is denoted in units, transferred to your demat account and listed on the stock exchange just like in local equities.

While investing in listed Gold ETFs investors have to pay a brokerage to the broker which varies from broker to broker. Also as investors have to open a demat and trading account with the broker they have to pay annual charges to maintain these accounts which again varies from broker to broker.

Tax Implications
Gold ETFs are more tax-efficient than physical gold. If held for more than a year, these funds qualify for a long-term capital gains tax (LTCG) of 10% compared to a three-year holding period for physical gold after which it qualifies for LTCG tax at the applicable tax rate. Also holding physical gold of more than Rs 1.5 million attracts a wealth tax of 1% of the gold value at the end of every year.

Factors to be considered before Investing in Gold 

You need to be very careful about investing in gold because unlike stock or other markets you don't have the option of investing a small amount. You must do lot of research and have a strong knowledge about the market information. You must decide how you are going to allocate it in the portfolio. Some investors choose to invest only in gold and not in any other sources. However this practice won't be suitable for all. Therefore you must first check up if you are falling under this category. Some other issues that are to be considered are as follows:

Factors that Influence Gold Price

Like any other resource the supply and demand constitutes to be an important factor in determining the price of gold. Since gold is a precious asset people even hoard it and its demand and price could increase drastically during inflation and even when there are wars. The price of gold shows an upward trend in most cases irrespective of the consequences due to the sentiment which people owe to the metal. They are prepared to pay any price for it.

Gold Investment Strategies

Some of the investors prefer to buy gold when the price increases because of the popular belief that it will increase further more and they can make profits by selling them thereafter. Other investors choose to buy gold when prices decline so that they can sell them at a higher profit when the prices increase. Another group of investors will make their decisions by testing if the current trend in pricing changes or not. 

Gold is an all season investment avenue. It is better to invest some percentage of your investments into this asset class. This is the best way of hedging to the inflation risk.

Fixed Maturity Plans

Fixed Maturity Plans (FMP)

What are FMPs?

FMPs as they are popularly known are investment schemes floated by mutual funds and are close-ended with a maturity period ranging from one month to five years. These plans are predominantly debt-oriented, while some may have a small equity component.

What is the objective of FMPs?

The basic objective of pure debt-oriented FMPs is to generate steady returns over a fixed-maturity period, thus protecting the investor from market fluctuations. FMPs are structured to offer capital protection and appreciation without an explicit guarantee.

How do FMPs work?

FMPs are passively managed fixed-income schemes, where the fund manager locks in to investments with maturities corresponding with the maturity of the plan. This effectively reduces what is called price risk or the potential for making a loss on bonds due to pressures to sell them off in the market. FMPs are launched in series, back-to-back, with each scheme replacing the one that has just matured.

Do FMPs provide assured returns?

No, they do not. However, investors are informed the indicative returns their investments are likely to generate, along with the tenure of investment. The prevalent yield, minus the expense ratio, which varies from 0.25 to 1 per cent, will be the indicative return.

Who should invest in FMPs?

Investors targeting a return on their investments over a fixed period of time and are indifferent to market volatility within that period should invest in FMPs.

Where do FMPs invest?

FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), money market instruments, corporate bonds and sometimes even in bank fixed deposits. The quality of investment typically consists of highest rated paper.

What is the difference between FMPs and bank fixed deposits (FDs)?

FMPs are the equivalent of a fixed deposit (FD) in a bank, with a caveat: the maturity amount of a fixed deposit in a bank is guaranteed, whereas the maturity amount of an FMP is merely indicated.

How do I choose between an FMP and a bank FD?

FMPs hold an advantage over FDs in terms of tax-efficiency. A comparison of a one-year FMP (dividend option) and FD (for individuals) shows that the post tax returns are higher for FMPs than FDs; this is because dividends are tax free for investors though the mutual fund pays a dividend distribution tax of 14.16 per cent (12.5 per cent plus 10 per cent surcharge plus 3 per cent cess). In contrast, interest on FDs is added to the main income and taxed at the applicable income tax rate. For an individual with an income of over Rs.10 lakh, the tax in the case of interest on FDs is 34 per cent (30 per cent plus 10 per cent surcharge plus 3 per cent cess). The post tax returns are thus higher for FMPs as the tax incidence is lower.

Which FMP is more beneficial – one with a growth option or one with a dividend option?

FMPs with dividend options are beneficial for a maturity of less than s year. In the case of FMPs with a growth option and a tenure of more than a year, you may use the benefit of long term capital gains where the tax rate is 10 per cent (without indexation benefits) or 20 per cent (with indexation benefits). You may also avail a double indexation benefit if one invests in an FMP in March 2007 and redeems the FMP in April 2008. In such an event, the incidence of tax is further reduced.

What are the risks of FMPs?

Unless otherwise specified in the objective of an FMP, investments are in risk-free or highly-rated assets for principal protection. However, the following inherent risks exist:

Interest rate risk: FMPs are designed to protect you from interest rate risk. However, as a plan is launched and money is collected, interest rates can fall before the money is invested and the funds will have to be invested at lower rates.

Gapping risk: If the fund manager is unable to find assets with a corresponding maturity to that of the plan, this leads to risks of asset liability mismatch.

Credit risk: The credit portfolio in the plan may suffer if rating agencies downgrade ratings. Downgrades reduce the price of securities.

Fixed Deposits

Fixed Deposits (FD)

Defining Fixed Deposits (FD)

When you want to invest your hard earned money for a longer period of time and get a regular income, Fixed Deposit Scheme is ideal

A fixed deposit is best suited for those investors who want to invest a lump sum of money at a low risk and are comfortable committing it for a fixed period of time, and earn a rate of interest on the same.

Some of the salient features of a bank deposit are:

Flexible Deposit Terms: The tenure of fixed deposits can vary from as low as 7, 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to 5 years. The minimum deposit amount also varies with each bank. It can range from as low as Rs.100 to an unlimited amount with some banks. The amounts can be in multiple of Rs.100.
Great Deals: The banks are free to offer varying rates of interest for products of different maturities. If you are flexible in terms of deposit tenures, you might find differential interest rates in odd tenures like 390 days or 200 days.
Safe Investments: Bank deposits are generally safe investments because they are insured under the Deposit Insurance & Credit Guarantee Scheme of India.
Flexible Interest Payment Terms : A Bank Fixed Deposit gives you the option of taking the interest income, as a lump-sum amount on its maturity as well as every quarter (quarterly interest payment) or every month (monthly interest payment)
Electronic Clearing: The Interest payable on Fixed Deposit can also be transferred directly to Savings Bank or Current Account of the customer.
Compounding: Compounding of fixed deposit interest rate is available for all  more than 3 months.

Five Vital Tips on Fixed Deposits

1. Check the premature withdrawal penalty before investing.

Try and invest the money in a tenure within which you will not need the money. But definitely check on the charges applicable in case you need to withdraw in an emergency.

2. Check the frequency of compounding of the deposit, when comparing two deposit offerings.

A rate which might seem higher upfront might have a lower return if it is not compounded as frequently. For example; Bank X offers a one year deposit at the rate of 9% compounded half yearly – which results in an yield of 9.2%. While Bank Y offers a one year deposit at the same rate of 9% but compounded quarterly – which results in an yield of 9.3%. You will earn more interest on fixed deposits at Bank Y because your return is compounded annually.

3. Split your Fixed Deposit investments to avoid TDS deduction.

If the interest earned is more than Rs. 10,000 in a single branch in one calendar year then TDS would be deducted. By splitting your deposits across various banks or branches you can avoid this deduction.

4. Always appoint a nominee.

When you open a fixed deposit appoint a nominee. It is essential for a quick and hassle free transfer of accounts. The nomination facility enables the bank to release the deposit amount to the nominee without insistence on a succession certificate or probate of the will from your legal heirs.

5. Take interest payouts based on your requirements

Most banks have many interest payout options, choose the one which suits your requirements best for example if you are retired person you could go in for monthly payments of interest.

Fees and Charges

Normally, there are no charges for a plain vanilla fixed deposit account. Charges are usually levied on premature withdrawal of the deposit or taking additional features like a debit card against it.

Tax Implications

The interest income earned on a deposit is taxable at the same tax slab as the customer is in. It will be added to his income in the year under the head “Other Income”.

Benefits of Fixed Deposits

• Interest paid either monthly or quarterly
• The yield or return on a fixed deposit is different from interest. Interest paid either monthly or quarterly
• Possible to take loans against fixed deposits
• Bank fixed Deposits are exempt from income tax up to a limit of  Rs.9, 000/- under Section 80L, though TDS is applicable on interest earned on Fixed Deposits of Rs.10,000/- and above.

Five-year tax-saver FDs

In Budget 2006, the government extended tax benefits to five-year tax-saver deposits.

Eligible: Eligible for exemption on five-year deposits on investments up to

Rs.1 lakh.

Locking Period: These fixed deposits will be locked for a five-year period from the effective policy date.

Advantage and Disadvantage: 

• We cannot exercise the option of premature withdrawal. Secondly, you cannot pledge the term deposit as collateral to secure a loan to meet your liquidity needs. Similarly, banks do not offer overdraft facility on tax-saver deposits.
• Unlike the plain vanilla fixed-deposit products, these tax-saver FDs do not have the sweep-in facility. This implies, you cannot link fixed deposit to the savings account whereby the surplus funds in the savings account can be automatically invested in this fixed deposit.
• In addition, there is no overdraft facility available on the tax-saver FD. As this instrument of saving money is special due to its tax-saving status, banks do not extend relationship benefits on the tax-saver FD.