Tax-advantaged FDs are one of the most common ways to lower taxable income. Your money is safe, the returns are guaranteed, and the interest rates are fixed. However, those looking for large returns sometimes get confused between the post office and bank deposits. Bank FDs and Post Office Term Deposits are two deposit tax saving schemes offered by both banks and post offices.
These schemes offer up to Rs 1.5 lakh in tax deductions on investments under Section 80C of the Income Tax Act of 1961. If you are simply interested in these schemes for the tax benefits, you should avoid them. Your investment should also be consistent with your personal finance and investment strategies. Your tax-favoured FDs or TDs must be a suitable fit for your financial objectives. Before engaging in these scams, investors should consider the TDs.
Bank Fixed Deposit
After a minimum lock-in period of 5 years, the interest generated on these FDs is taxed according to the investor’s tax bracket. If the investment is made jointly, only the first holder listed on the FD receipt will be eligible for tax benefits. On tax-free FDs, investors can choose between cumulative and non-cumulative interest options. Premature withdrawals from tax-saving FDs with a five-year lock-in term are not authorised. If you want to invest for the long term while saving money on taxes, these tax-free FDs with a 5-year lock-in period could be appropriate.
Most banks provide older citizens with an additional 0.50 per cent interest rate. Few banks, like SBI, also have a unique scheme for senior folks that provides them with additional perks. To learn more about the offers and plans, please visit the relevant bank office or online.
Post Office Time Deposit
The POTS stands for National Saving Time Deposit Account. The deposit made in the scheme for the 5-year fixed deposit account qualifies for an income tax deduction under Section 80C of the Income Tax Act of India, 1961, just like bank FDs. Interest is paid weekly but yearly on time deposits at the post office.
The investment from the POTS cannot be withdrawn from a tax-deferred savings account before it matures. You will not be able to withdraw or borrow money from a tax saver FD. In contrast, a bank fixed deposit can be withdrawn early the next day. POTD is available in four investment periods: one, two, three, and five years.
Tax Deducted at Source
On tax-saving fixed deposits, interest is paid either monthly or quarterly. You can also choose to re-sell it. Interest is taxed based on the tax bracket in which your taxable income falls.
FDs issued by banks and TDs issued by post offices are nearly identical. Nonetheless, there are some differences between the two. Individual banks control bank FDs, so interest rates differ from one to the next. Post Office TDs are administered by post offices, and interest rates change at the beginning of each quarter. Bank CDs can be purchased for as little as four days or as long as ten years. POTD is offered for one, two, three, or five years.
When comparing interest rates, the Post Office time deposit offers the highest rate when compared to other bank fixed deposits. Postal Time Deposits, unlike banks, do not provide higher tax-saving interest rates to senior citizens. Postal TDs are more secure because they are sponsored by the government of India.