Tax Exemption Confusion: Can a 5-Year Fixed Deposit Really Offer Continuous Benefits?

One of our employees has opened a tax deposit FD for 5 years in 2019, and he is saying and arguing that he can get a tax exemption for 5 years continuously. Is it correct?

Dear Sakshi, Generally, to become eligible for tax exemption, the investment made in that financial year is applicable. If one buys a National Savings Certificate (NSC), the savings are applicable for that financial year only. How can it be spread across an entire period of six years? Please confirm to us what type of investment scheme it was. No comments can be given unless we have complete knowledge of the investment scheme.

Thanks,
Dinesh Divekar

Yes, he can avail the benefit as per Section 80C of the Income Tax Act.

Dinesh Divekar, he is seeking the benefit of Tax Saver Fixed Deposits under Section 80C for investments made in 2019.

Tax Savings FD Eligibility

Tax savings FD is eligible, but the FD certificate is stamped "not eligible for premature redemption/encashment" by the bank. On it, they clearly mention the financial year for which it is eligible. You can ask for the FD copy. If it is eligible, then the 80C stamp would be there, with a clear 80C clause and year.

Tax Benefit for the 5-Year Tax Saver Scheme

The tax benefit for the 5-year tax saver scheme is only applicable in the year of investment. Interest earned is taxable, and TDS rules will be enforced.

Ensure there is a single line break between paragraphs.

Just found this on Google:

Income Tax Deduction Under Section 80C

You can take advantage of the income tax deduction provision under Section 80C of the Income Tax Act by investing up to Rs.1.5 lakh in a tax-saver fixed deposit account. The scheme ensures returns along with capital protection. However, you must note that the interest income from the account is fully taxable. The tax liability is totally dependent on your total income for the financial year and the tax slab you fall into. The interest income falls under the head ‘Income from Other Sources’. In addition, banks deduct tax at source if the interest earned exceeds Rs.40,000 in a financial year across all the accounts held with the bank. A TDS certificate will be issued to confirm the details of the deduction. Read here to know more about the taxation on FD returns.

So the income tax deduction is only for the year of investment.

No, your employee is absolutely wrong. First of all, there is no exemption; rather, there is a deduction under Section 80C for investments made. Hence, the deduction is available under Section 80C only in the year of investment.