Ever since we gain maturity the family starts teaching us the concept of savings. We see our parents keeping the money aside for future endeavors. They spend mindfully to keep the family protected from unforeseen events. Since ages, investing in tax saving fixed deposits have remained in trend. Apart from the fixed deposit, life insurance also attracts significant attention from individuals. It is because more than the tax saving feature, life insurance policies provide financial protection for future goals.
But out of the two, which one is better becomes a question!
There are multiple insurance products and options of fixed deposits where you can put your money.
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Let us explore the two investment options, one by one.
What is a tax saving fixed deposit?
A tax saving fixed deposit is a financial instrument that offers tax deduction under Section 80C of Income Tax Act, 1961. A fixed deposit helps individuals to save funds for their future. You can choose the tenure of the FD according to your convenience. FDs can help save money and it comes with the benefit of interest also. For example, Akash got a fixed deposit for the amount of Rs.5 lakhs. The tenure he chose for the FD was 5 years. The rate of return for the duration was 7%. After 5 years, Akash will get more than the original amount that he had at the inception of FD.
He will be able to save more by getting an income tax deduction. A tax saving FD allows you to get a maximum deduction of Rs.1.5 lakhs in a single year.
Features of Fixed Deposit
- A fixed deposit comes with the lock-in period of 5 years.
- You can get a loan on a fixed deposit.
- The interest earned on a fixed deposit is completely taxable.
What is an insurance policy?
A life insurance policy is a contract between the insured and the insurance company. The policy pays the death benefit to the nominee after the life insured passes away. Under the life insurance policy, the life insured is liable to pay a premium (whether annually or in installments) to keep the policy contract in-tact.
Features of Life Insurance
- A life insurance policy is issued in the name of the policyholder.
- Proposer gets the advantage to choose the premium payment frequency.
- Option to customize the policy tenure.
- Customize the sum assured when purchasing the insurance policy.
- The insurance policy also has a nominee who will receive the death benefit.
- The life insurance policy comes with the maturity benefit.
- Insurance policy gives tax benefit under Section 80C of Income Tax Act, 1961. The total amount allowed per year for tax deduction is Rs.1.5 lakhs. Apart from the premium, the death benefit received at the end of the policy is also tax exempted under Section 10(10D).
Tax Benefit under Insurance Policy.
Under Section 80C of Income Tax Act, 1961, the premiums you pay under the life insurance policy is eligible for tax deduction. The limit for deduction is Rs.1.5 lakhs. Section 10(10D) of income tax makes the maturity tax-free but only if the premium is not more than 10% of the sum assured under the policy.
After reading about the fixed deposit and the insurance policy, let us explore the difference between the two. It will help you choose a better option to save tax.
Which is better: Fixed Deposit or Life Insurance?
Let us look at the difference between the fixed deposit and the life insurance to find out which is better in two?
| Particulars | Fixed Deposits | Life Insurance |
| Death Benefits | Fixed deposit do not come with a death benefit | Life insurance policies are designed to give death benefits to the life insured. For example in the term plan, after the life insured passes away during the policy term, the nominee gets the death benefit. |
| Lock-in Period | Fixed deposits do not come with a lock-in period. | Life insurance policies often come with a lock-in period. For example, ULIPs come with a lock-in period of 5 years. |
| Guaranteed Returns | Under the fixed deposit the returns are guaranteed at the rate specified at the time of inception. | Under life insurance policy, the returns are affected with the market volatility. |
| Flexibility | Fixed deposits do not offer any flexibility iof switching. | Life insurance policies come with the benefit of flexibility like in ULIPs you can switch between the funds. |
| Charges | Fixed deposits do not attract any charges like allocation. | Life insurane policies which includes fund management attracts allocation charges. |
| Taxation Benefit | The returns on fixed deposit are fully taxable. | You can avail tax deductions on all the premium as well as the maturity amount. |
After reading the difference between the fixed deposit and the insurance policy, it is evident that the returns on fixed deposits are lower. But it also signifies that these are low-risk products and guarantees a fixed percentage of returns.
The insurance policies like term plan, savings plan, pension plan guarantees death benefit. Apart from the death benefit, some of these policies also give high returns that enables you to fulfill your future goals like child’s education or plan financial security for your life after retirement.
With the declining percentage of interest offered by the banks in fixed deposits, the fascination for FDs has declined drastically. It does not allow the buyers to beat the inflation in the same proportion. Hence, buying a fixed deposit from the banks that offer high interest rate is important. Unlike fixed deposits, the life insurance policies are safer option. The premium under the policies remain the same for the policy term. The returns are undoubtedly affected by the market volatility but the death benefit is assured. The amount received by the nominee after the death of the life insured is a savior to handle the unexpected financial crisis.
Conclusion:
Considering the current changing trends of lifestyle and significant rate of reduction in life expectancy, one must prefer to buy life insurance policy over a fixed deposit. Both are tax savings but reaping financial benefits is another angle to it. Tax saving fixed deposit can keep your money safe but it does not match the rising expenses. On the other hand, life insurance tax exemption on maturity and tax deduction on the annual premium saves you more money. It helps you keep your family protected and prevent your savings from draining. For more details on tax savings under life insurance, read here.
