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Sunday, February 5, 2012

Yearend tax planning part 1- Tax saving Fixed Deposits

As year-end approaching near, it’s time for tax payers who have not done any tax-planning to give it a thought else they shall end up paying tax which could have been easily saved.
Section 80 C of the income tax act allows tax payers to invest up to Rs. 1,00,000 in various instruments like life insurance premium, PPF, tax saving  FDs (and many more other instruments)  to claim the deduction under section 80 C.
In the first part of this series I shall discuss ‘Investment in Tax Saving FDs’. This investment is suitable for risk-averse investors who want hassle free investment.
One thing should be noted that only FDs with banks are entitled for the aforesaid  deduction this means s if someone invests in FD’s of  private companies, his investment shall not be entitled for the deduction under section 80 c of the IT act.
Tax-saving FDs come with a 5 year lock-in period  and as per government rules premature withdrawal, loan against FD and auto renewal facilities are not available on tax saving FDs. Only one nomination is allowed but it can be changed thereafter during the tenure of the FD.
Investor can opt for monthly or quarterly interest payment option. If one chooses the ‘interest reinvestment’ option then interest is quarterly compounded.
One should never underestimate the power of the compounding which has also been termed as the 8th wonder of the world.
Presently many banks like SBI are offering tax saving FDs with coupon rate of 9.25 % this means on an investment of RS. 10,000 one shall get Rs. 925 Rs. as interest(considering he opts for interest payment option) so on maturity date, an investor gets 4625 Rs. interest.
If investor opts for the interest repayment option that means interest is added to the principal and next interest calculation is done on this new principal (principal +interest) and this process is repeated .
Under  ‘interest reinvestment plan maturity amount becomes Rs. 15797 thus fetching Rs. 5797 as interest which is Rs. 1172 more than the ‘interest payment option’.
This difference becomes significant when the invested amount is higher.

Let’s understand the aforesaid with an illustration-
If Mr. Singh has annual salary of Rs. 2,50,000 if he does not do any tax planning then he becomes liable to pay Rs. 7210 tax.(10% tax (& cess on it) on Rs. 70,000 : 2,50,000-1,80,000 (exemption limit)).
If Mr. Singh had invested Rs. 70,000 in any of instruments falling under 80 c , he would have saved the tax of Rs. 7210.

Investor should  not forget to furnish their PAN number along with the application (in case their PAN is not updated in the bank’s record). In the absence of the PAN number TDS shall be deducted at the rate of 20% (against the normal rate of 10%) and no TDS certificate shall be issued to the investor. A passport-size photograph of the investor may also be required while opening the Tax saving FD.

Morale: Tax-saving FDs are best suited for investors who seek returns with minimal risk and hassles. If one does not need interest at regular interval he should choose the interest reinvestment option.


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