What is the Major Difference Between Normal FD and Tax Saving FD?
Every person wants to keep their money safe. They also want to accrue interest and create a source of income from the money they save.
One of the best ways to do both is to deposit the money with a bank. The bank will keep it safe and allow the depositor to earn interest as per the agreed-upon terms. A fixed deposit is considered a better option as it locks in the money for a set tenure. The depositor earns a fixed income on the deposited money. The income accrued will depend on whether the depositor searched for the best FD rates and types of deposits before reaching a decision.
Here, we are looking at the two different FD types and how they are different from each other.
What are the defining features:
FD – Deposit any amount with the bank for a tenure ranging from 7 days to 15 years. You can earn interest annually or opt for a cumulative FD scheme wherein the interest earned is given at the end of the tenure.
Advantages of the FD
- The interest earned can be used or saved as per your requirement. You can set up the account to earn a monthly or annual income, or add the interest earned with the deposited amount
- It makes it easier to save money. Suppose you have some money to pay for a piece of jewellery. But, the jeweller tells you to come after ten days. You can save the money in an FD for seven days, and earn an additional amount
- You can save for 15 years. Once again, suppose you want to save for college fees of your newborn son. A 15-year tenure means you cannot withdraw the money, and the interest earned will get added to the principal amount, giving you an assured sum after 15 years.
Tax Saving FD – Under the Income Tax Act 1961, the lock-in tenure for the FD is fixed at five years while the amount is INR 1 lakh.
Advantages of Tax Saving FD
- The interest earned is taxable, but you can claim a deduction of up to Rs 1.5 lakhs, under section 80C of the Indian Income Tax Act, 1961
- You can use the deduction to create another FD or spend it as per your requirement or desire The major difference between the two FDs is obvious
- FDs give you the freedom to choose the tenure and deposit amount
- Tax-saving FDs have a pre-decided tenure and deposit amount
However, both types of deposits have their own set of advantages. The best FD rates offered for both vary anywhere between 5.5-7.75%. You can choose to have both or opt for the one that meets your short-term or long-term requirements. Remember, both the options are one of the safest forms of investment and savings, as they are not subject to market upheavals. At the end of the tenure, you have the assurance of getting the principal amount back along with interest accrued.
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