The recent increase in the interest rates on small savings schemes for the current quarter will sooner than later force the banks to increase interest rates offered by them on fixed deposits. With the imminent increase in the fixed deposits interest rates by the banks, the fixed deposits will become a more attractive investment product specially for senior citizens. Let us see how.
Suitability of the products
An individual or an HUF can invest in the name of the individual himself or in the name of any member of the HUF upto Rs. 1.50 lakh in tax saving fixed deposits and claim tax benefits. Since a senior citizen is supposed to have retired from active earning life and thus his risk taking ability have diminished substantially so can not invest in the market linked products like Equity Linked Saving Scheme (ELSS) or Unit Linked Investment Plans. For senior citizen only few products are suitable for claiming deduction under Section 80 C as they generally do not have school going children or do not have any running life insurance policy. Their EPF contributions also must have stopped immediately after retirement in case they were employed. In case of self employed the PPF accounts would have already matured and have no new accounts would have been opened due to long tenure of 15 year. Such situation leaves the senior citizen with only few investment products like Senior Citizen Saving Scheme(SCSS) and post office and bank fixed deposits.
Since there is a limit of Rs. 15 lakhs which can be invested in SCSS and in most of the cases full deposits are generally made immediately after retirement in one or at the most in two years only.
Since the interest rate on tax saving fixed deposits are fixed at the time of making the deposits, it is not subject to any interest rate fluctuation during its tenure so is less risky to that extent unlike SCSS where interest rate is fixed only for one quarter at a time. Therefore it helps the senior citizen in planning your future cash flows more accurately and plans it accordingly.
With increase in fixed deposits rates as a anticipated the fixed deposits will also become very good investment opportunity for senior citizens where they are offered higher rate of interest as compared to regular customer. With introduction of Section 80TTB granting a deduction for all bank interests upto Rs. 50,000/- to resident senior citizens, the bank fixed deposits have certainly become more attractive to senior citizens. This is more true in case the limit of investment in senior citizen saving scheme has already been exhausted.
Basic features of tax Saving Fixed Deposits
The fixed deposit under this scheme can either be made in a single name or in joint names of not more than two person one of whom can even be a minor. Deduction available for investment under Section 80C can only be claimed by the first holder. Therefore please be careful to ensure that the person contributing the money is named as first holder of such FDR.
Neither you can pledge these fixed deposits nor you can go for premature encashment of these deposits before completion five years. However in case of death of first holder or the sole holder during currency of the term of deposit, the second holder or the legal representative or nominee can request for premature withdrawals of deposit under this scheme.
So take your liquidity requirement into account before placing these fixed deposits.
You can appoint nominee/s to receive the money in case of death during currency of the deposits. Please note that for deposit made for and on behalf of a minor, no nomination can be made. In case the nomination is made in favor of more than one person, all nominees will have to sign the necessary documents for claiming money from the bank.
PAN is mandatory for making these tax saving deposits. In case you misplace the deposits you need to follow a very elaborate process to claim the duplicate certificate so please be careful to preserve deposit receipt
Interest on these deposits are taxable and bank/post office will deduct appropriate tax on interest paid/credited.
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Balwant Jain is a tax and investment expert and can be reached on firstname.lastname@example.org and @jainbalwant on twitter.