Fixed deposits (FDs) are a
popular investment option for risk-averse investors. While most FDs offer safe returns, a
5-year tax-saving FD comes with specific
rules under Section 80C of the Income Tax Act. Failing to follow them, especially regarding
premature withdrawal, can lead to
significant financial loss.
📌 What Is a 5-Year Tax-Saving FD?
·
Tenure: 5 years·
Tax Benefits: Eligible for
deduction under Section 80C, up to ₹1.5 lakh per financial year·
Purpose: Encourages
long-term savings while reducing taxable income·
Post office FD Example: ₹5 lakh invested can grow significantly over 5 years at current interest rates
⚠️ The Mistake That Causes Huge Losses
·
Premature Withdrawal: These tax-saving FDs
cannot be withdrawn before 5 years.·
Penalty: If withdrawn early, you
lose tax benefits, and interest may be
reduced by 1% or more.·
Impact Example:o Investment: ₹5 lakho Expected Maturity: ₹6.38 lakh (assuming 7% interest compounded annually)o Premature closure: Loss of ₹1.38 lakh in
interest and tax benefits💡 Key Rules to Remember
1.
No Partial Withdrawals: You must keep the full amount for
5 years.2.
Tax Deduction Only at Maturity: Section 80C benefits apply
only if the FD completes its full tenure.3.
Interest Rate Changes: Premature closure may lead to
lower interest rates applicable at the time of closure.4.
Nominee Benefits: Make sure to
nominate someone for smooth processing in case of emergencies.
📌 Alternatives to Avoid Loss
·
Recurring Deposits (RDs): Flexible monthly deposits with shorter tenures·
Non-tax-saving FDs: Allow early withdrawal without losing interest (though no 80C benefits)·
Debt Mutual Funds: Better liquidity and potential for higher returns
📌 Final Thoughts
While
5-year tax-saving FDs are safe and offer tax benefits,
premature withdrawal can be costly, especially for large investments like ₹5 lakh. To avoid losing
up to ₹1.38 lakh, investors should
plan their liquidity needs carefully before committing to long-term FDs.
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