Tax-saving fixed deposits. Is it worth investing in it anymore?
For investors seeking a minimal risk instrument, tax-saving fixed deposits (FDs) continues to be preferred choice. While interest rates are in the range of 5% - 5.5% by leading banks, it is worth noting that interest income earned on these deposits will be subjected to tax, and TDS will be applicable. "For individuals with higher personal tax rates, effective post-tax returns could be in the range of 3.5%-4%. This will be locked in for a period of five years," pointed out Abhishek Soni, Co-founder, and CEO, Tax2win.in.
Tax Savings FDs are conventional low yield investment options through which investors can avail the benefit of deduction under section 80C of the Income Tax Act, 1961, for the sum of money invested/deposited in such FD's during the year. These FD's generally offers a lock-in period is five years.
"The interest income earned on these FD's are fully taxable under the head "Income from Other Sources." However, in the case of senior citizens, an exemption is provided for FD interest upto Rs 50,000 under section 80TTB of the Income Tax Act. The Tax on the FD interest further reduces the actual return on Tax Savings Fixed Deposits," explained Suresh Surana, founder, RSM India.
As per the experts, the traditional approach of the people that makes them believe that tax-saving fixed deposits are the safest investment options because of their inclination. However, they either do not know that if the bank defaults or shuts down, they can get only Rs 5 lakhs even if the FD amount is more than that. "Considering the interest rates which are lower than the rate of inflation along with the taxable interest at maturity, I wouldn't suggest anyone to invest in tax-saving fixed deposits," concurred Manish Hingar -Founder of Fintoo.
Is it worth investing still in tax-saving fixed deposits?
Further, the subscriptions towards tax savings instruments are more from the last-minute rush. No doubt that February-March is called tax savings season in the financial world. One reason is also knowledge about other options.
"People may be aware of other options, but their comfort level towards FDs has always been higher despite dropping returns or the rising inflation. FDs is a product offered by banks. The combination of mere reach of all banks put together & investors' traditional comfort level towards FDs makes a difference in the number of people investing in Tax savings FDs," said Sandeep Bhosle VP- Customer Interaction, Quantum AMC.
Even though there are better options available, tax-saving FDs are still worth the investment. It is because you can avail income tax deduction provision under section 80C of the Income Tax Act by investing up to Rs 1.5 lakh in a tax saving FD. This scheme ensures returns along with capital protection.
"There are many reasons to still invest in tax saving FDs, especially with the fact that it takes 5-10 minutes to invest in Tax Saving FDs easily from the apps provided by banks. It offers the section 80C tax benefit, but it is favourite because it has the smallest lock-in period of 5 years and offers a periodic interest payout option," said Amit Gupta, MD, SAG Infotech.
Should you invest?
As per the financial experts, one should not have long-term allocations in their portfolio based on the benefit you; they receive for the year. Tax regimes can change and affect your long-term strategies. The benefit now available may not be there some years down the line.
"Well, the question is not whether tax savings instrument FDs are worth it. Investors need to ask, 'does it fit my portfolio or my asset allocation?' Tax saving instruments give a tax benefit and save money for you. But when you invest for long-term financial goals, the advantage you get as a tax benefit is a by-product," pointed out Bhosle.
"All structured and regulated investment options are good as long it fits in your risk-taking appetite and financial goal. Tax saving FDs are still a good option for risk-averse investors," agreed Ravi Rajpal, Founder, My Money Management.
Are there any better alternatives than fixed deposits for tax savings?
Investments in Provident Fund, National Saving's Certificate (NSC), Equity Linked Savings Scheme (ELSS), etc., can be good alternatives as compared to investment in Tax Savings FD's. Some of the instruments, such as investment in PFs, NSCs, provide a sovereign guarantee for the capital and stable and better returns compared to FDs.
"I would suggest investing in tax saving Equity Link Saving Scheme (ELSS) which has a lock-in period of 3 years, helps you to save tax and also enables you to generate wealth in the long-term. Additionally, you can also consider Unit Linked Insurance Plans (ULIP), which have a lock-in period of 5 years. Both these investments are market-linked and hence can beat inflation in the long term," said Hingar.
However, again a good alternative depends upon the needs of the specific investor. One particular tax-saving option might be good for someone but not for another. Fixed deposits are assumed to be safe and capital-protected products.
"Remember investments are perceived by investors in a combination of trust, safety, returns, liquidity while also considering the convenience of transacting. Everyone may not be in the race to have No. 1 returns. The other options to save tax and long-term investments can be ELSS Funds, NSC, PPF, NPS- National Pension schemes. ELSS is easy to invest & track has enough liquidity after the applicable lock-in period," said Bhosle.
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