Fixed Deposit: How senior citizens can get tax-free return by investing in tax-saving FDs (2024)

Tax-saving fixed deposits (FDs) can help you to get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961. The interest earned on these fixed deposits is usually taxable. However, there is a way to earn tax-exempted returns from tax-saving FD if you are a senior citizen, thanks to certain exemptions. How does it work? How much should a senior citizen invest to get a full tax-exempt return from tax-saving FDS? ET Wealth Online explains:

Be it a cumulative FD where the interest is paid at the time of maturity or a non-cumulative FD where the interest is paid periodically, you have to pay tax on the interest income of your fixed deposit every financial year. This interest is taxable as per the tax bracket of the investors, except for certain exemptions given to senior citizens.

Also read: How selling equities can help save tax for FY 23-24.

What are the tax deduction rules on FDs for senior citizens?

Senior citizens or those who are of 60 years or older can get a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961. They can also claim a deduction of up to Rs 50,000 each financial year from their gross total income, under Section 80TTB of the Income-tax Act, 1961. This tax deduction will be applicable on interest earned on tax-saving FDs as well.

Keep in mind that the threshold limit is Rs 50,000 per financial year is for aggregate interest income of bank deposits (savings or fixed), post office deposits, and deposits held in a co-operative society engaged in the business of banking, including a co-operative land mortgage bank or a co-operative land development bank.

To get the optimum benefit of Section 80 TTB, senior citizens need to invest in a way that their total interest income from fixed deposits should remain close to the limit of Rs 50,000 in a financial year. However, for many senior citizens, who primarily depend on interest income for their living, the limit of Rs 50,000 may not be sufficient.

How much should a senior citizen invest every year in a tax-saving FD to get a tax-free return?

You can only invest up to Rs 1.5 lakh in a tax-saving FD. So, instead of putting all your money into one account, divide it into small parts and invest in cumulative tax-saving FDs every year to get a return that is fully exempted from tax.

How will it work? Let me explain. All tax-saving FDs have a fixed five-year tenure. As they are booked every successive year, they will keep maturing every year after a five-year interval. Very similar to fixed deposit laddering, this approach will mitigate the risk of having all fixed deposits maturing at the same time and getting reinvested at prevailing rates (high or low) at that time, say experts.

Currently, a lot of well-known banks offer interest rates in the range of 7-7.75% on tax-saving FDs for senior citizens. You need to invest in such a way that the total interest income, even when all five fixed deposits are in force, never crosses the Rs 50,000 annual exemption limit under Section 80TTB. For the sake of calculation, we have assumed you will get a constant interest rate of 7% that you are going to get in the coming years.

Suppose a senior citizen is investing Rs 1,20,546 at an interest rate of 7% in a tax-saving FD now. The interest is compounded on a quarterly basis. At the end of the first year, he will earn an interest of Rs 8,662. As the interest income is within the threshold of Rs 50,000, he does not have to pay tax on it. Moreover, banks will not deduct any tax deducted at source (TDS) as the amount is within the threshold for TDS. (For senior citizens, no TDS is levied if the interest amount from the fixed deposit is within Rs 50,000 in a financial year.)

In the second year, Rs 1,29,209 (first year's interest and initial principal) will be reinvested in the FD. Now, he opens another fixed deposit of the same amount at Rs 7% interest per annum in the second year. So, he will get a return of Rs 17,947 from both fixed deposits at the end of the second year. He can claim a tax deduction on this income under Section 80TTB. No TDS will be levied as the interest income from the fixed deposit is within Rs 50,000.

At 7% interest rate, an FD of Rs 1,20,546 each year till five years will ensure tax-free return

Similarly, he can invest Rs 1,20,546 every year in a tax-saving fixed deposit and enjoy a tax-free return, assuming the FD offers an interest rate of 7%. At the end of the fifth year, his first tax-saving FD will mature, and he will get a return of Rs 1,70,546. So, his return from the tax-saving FD will be Rs 49,999.85 at the end of the fifth year. Throughout the five years, his interest income from fixed deposits remains below the limit of Rs 50,000. The investor can claim a tax deduction of Rs 50,000 under Section 80TTB every financial year while filing the income tax return. Also, there will be no loss due to TDS deduction for the whole five years.

From fifth year onward, the maturity amount of Rs 1.70 lakh that will be taken out will be higher, whereas the reinvestment amount will be lower at Rs 1.20 lakh.

At 7.5% interest rate, an FD of Rs 1,11,124 each year till five years will ensure tax-free return

Tax-free returns from FDs: What you need to keep in mind

Keep in mind that Section 80TTB takes into account interest income from savings accounts and deposits in post office and co-operative banks. We have assumed here that the senior citizen is only earning interest from the fixed deposit. If the investor is earning interest from any other deposit, including a savings bank account, he will need to factor that into his calculations.

If you are investing in a tax-saving FD now, you must know the interest rates of fixed deposits will vary each year and you need to tweak your FD amounts accordingly. We have assumed the rate of interest to explain the concept. Lastly, FD deposits must match the investor’s overall investment horizon. So, choose your risk appetite while booking an FD.