Now, avail of tax benefits on fixed deposits

FDs with a term of not less than 5 years have been included under Section 80C
Vivek Kaul
Mumbai

Malti Kasbekar had spent considerable time listening to the budget speech on Tuesday. She was particularly interested in figuring out what the finance minister had laid out for a common person like her. Malti felt the speech was too boring. She remembered days of yore when the earlier finance ministers like Manmohan Singh and Yaswant Sinha had interspersed their speeches with couplets of Ghalib. Her father-in-law, who was also watching the speech, reprimanded her for this. “The government budget is a serious activity and may or may not entertain, like your favourite daily soaps,” he said. Point taken. Malti started paying attention to the speech. Towards the end of the speech she heard the finance minister saying the word — fixed deposits (FDs). Her husband had most of his investments in FDs. The FM had included FDs, with a term of not less than 5 years made with banks, under the current basket of instruments under Section 80C of the Income Tax Act, 1961. Under Section 80 C, taxpayers can make an aggregate deduction of up to Rs 1,00,000 from their gross income for certain kinds of investments. This decision of FM made her happy. Her husband was very lazy when it came to financial planning. He had all his money in fixed deposits. But this did not help in tax savings. Earlier, till financial year 2004-05, under Section 80 L of Income Tax Act 1961, a tax deduction of up to Rs 12,000 was allowed for interest earned on FDs with banks. But with low interest rates on FDs very little deduction was possible. With the introduction of Section 80 C in the last budget this deduction was no longer allowed. Now, with fixed deposits coming under Section 80C, investors who are lazy at financial planning will benefit the most. But as far as returns are concerned there are better options available in the market right now. National savings certificate (NSC) VIII is one of them. It has a six-year maturity period. In order to claim a tax deduction for investing in Fds one has to invest for a minimum of five years. The interest rate on FDs of maturity greater than or equal to five years is around 6.5%- 6.75% vis-a-vis NSC VIII, which gives an interest rate of 8%. Also the investments will be locked in for a similar period in both the cases. Further, if one is ready to lock-in investments for a greater period, then public provident fund (ppf) is another good option available to the investor. The investment here is locked in for a period in between 15-16 years. The interest payable in this case is also 8%. Investments made in NSC VIII and PPF are allowed for a tax deduction under Section 80C. Though in case of PPF, an investor cannot invest more than Rs 70,000 in a given year. This move makes a bank fixed deposit with an interest reinvestment of interest option very similar to NSC VIII as far as the structure is concerned. In case of NSC VIII the interest accumulates and is not paid to the investor every year. The interest that accumulates is treated as invested in NSC VIII. Hence it qualifies for an exemption under Section 80 C for the first five years. In the last year, the interest is handed over to the investor and hence does not qualify for a deduction and hence is taxable.Tax experts are of the view that if the investor opts for a reinvestment of interest option in case of fixed deposits, the accumulated interest would also be eligible for a tax deduction under Section 80 C. And like in case of NSC VIII the interest earned in the last year of the fixed deposit would be taxable. But if the investors opt for a monthly or quarterly interest payout option while investing in a fixed deposit, the interest they earn would be taxed depending on the marginal tax bracket they fall into. (The example is hypothetical)