India is a country of savers. We prefer our investment amount to safety and security, even if it comes at a risk of low returns. This is the reason why, for generations, Fixed Deposits have been the preferred option for Indians. Even though equity investment options like Mutual funds are ideal for long-term goals, we still prefer FDs.
The same logic extends to tax saving too. While there are ELSS Mutual Funds, many investors prefer tax-saving FDs to save tax under Section 80C. So, if you are looking for information about tax-saving FDs, including their benefits and the best tax-saving fixed deposit rates, read on.
What is Tax Saving FD?
Tax saving deposits are a type of deposit scheme that allows you to enjoy a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. They come with a lock-in period of 5 years. Just like other fixed deposits, returns on a tax-saving FD are fixed for the term of the FD. They don’t change, no matter what. However, you cannot make any premature or partial withdrawals from your tax saving deposit. Any loan facility against such tax-saving fixed deposits is also not available.
How does tax-saving FD work?
Tax-saving FDs are similar to other normal FDs offered by various financial institutions, wherein you invest a lump sum amount for a fixed period and earn a guaranteed return on your investment.
The only difference between standard and tax-saving FDs is that tax-saving fixed deposits have a minimum lock-in period of 5 years. This means you can only withdraw your fixed deposit after five years. In these five years, you earn a fixed return on your investment, and at maturity, you receive the total accumulated corpus.
Interest earned on these fixed deposits is taxable, so you receive the corpus after TDS (Tax Deducted at source) deduction by the bank. Apart from this, if you do not want to close your fixed deposit at maturity, you can also renew it.
Best Tax Saving FD Rates
Let us look at the tax-saving FD interest rates for the year 2024 of the top banks.
| Banks | General Public FD Rate | Senior Citizens FD Rate |
|---|---|---|
| HDFC Bank | 7.00% | 7.75% |
| IDBI Bank | 6.5% | 7% |
| IndusInd Bank | 7.85% | 8.25% |
| Federal Bank | 7.75% | 8.25% |
| DCB Bank | 8% | 8.60% |
| IDFC First Bank | 7.75% | 8.25% |
| RBL Bank | 8% | 8.50% |
| YES Bank | 7.75% | 8.25% |
| Axis Bank | 7.10% | 7.75% |
| State Bank of India | 7% | 7.50% |
Tax Saver FD v/s Other Tax Saving Instruments
Now, let us see how tax-saver FDs fare against other tax-saving instruments by comparing them.
| Instrument | Lock-in Period (in years) | Returns* (%) | Taxation |
|---|---|---|---|
| Equity Linked Savings Scheme (ELSS) | 3 | Not guaranteed. But historically, 5-year returns have been in the 10% – 12% range. | LTCG over Rs.1 lakh is taxable @10% |
| Public Provident Fund (PPF) | 15 | 7.10% | Tax-free |
| Unit Linked Insurance Plan (ULIP) | 5 | Depends on investment | Returns on maturity are tax-free u/s 10(10D) |
| Sukanya Samriddhi Yojana (SSY) | 21 | 8% | Interest income is tax-exempt |
| 5-year tax saver FD | 5 | 5.5% – 7.75% | Interest income is taxable as per the income tax slab. |
| National Savings Certificate (NSC) | 5 | 7.70% | The interest received on maturity is taxable |
| National Pension Scheme (NPS) | Till retirement | Market-linked | Income from mandatory annuity purchases is taxed as per the income tax slab rate. It falls under the EEE (Exempt, Exempt, Exempt) tax basket, and hence there is no tax on returns or maturity amount. |
*Returns are the latest subject to changes
Benefits of Tax Saving Fixed Deposits
Listed below are the key advantages of investing in tax-saving fixed deposits.
- Interest compounded over the tenure of the fixed deposit makes your investment grow faster.
- Putting money in fixed deposits is considered safe as there are minimal risks attached to them.
- Unlike mutual funds, the returns of a tax saver fixed deposit are not market-linked. They carry a fixed interest rate, and the returns are guaranteed throughout the tenure. So using anonline FD calculator you can easily calculate how large a tax-saver FD corpus you will accumulate at maturity.
- Like other fixed deposits, senior citizens enjoy 0.25% to 0.5% higher returns on their tax-saving fixed deposit investments than regular customers.
- Tax-saver FD scheme is eligible for deduction under Section 80C of the Income Tax Act up to Rs.1.5 lakh.
- The minimum deposit amount starts as low as Rs.1000.
Who Should Invest in Tax-Saving FD?
Tax-saving fixed deposits are a secure investment option suitable for individuals with the following requirements.
Tax Saving: Tax saving Fixed Deposits are eligible for tax deduction under Section 80C. Hence, it is ideal for investors seeking to maximize their tax savings while enjoying stable returns.
Guaranteed Return: Fixed deposits offer fixed returns on your investment without being affected by market volatility. Hence, it provides a secure avenue for investors aiming to earn fixed returns on their investments.
Risk-averse investors: If you do not want to take any market risk, then the tax-saving FDs can be a viable option for you as there is no risk involved.
Points to Remember When Putting Money in Tax Saving FD?
Before you decide to invest in tax-saving fixed deposits, the following are crucial tips to bear in mind.
Eligibility Criteria:Only individuals and HUFs are eligible to invest in tax saver FD schemes. Besides, a minor can invest jointly with an adult.
Minimum Deposit: The minimum amount of investment in a tax-saver FD varies from one bank to another. Moreover, there is no maximum limit. However, the amount that can be claimed as a deduction under Section 80C is ₹1.5 lakh.
Lock-in Period: Tax Saving FDs come with a minimum lock-in period of 5 years.
Loan Facility:You cannot avail of a loan against tax-saving FDs.
Premature Withdrawal:Premature withdrawal before the maturity date is not allowed for tax-saving fixed deposits.
Investment Mode: To invest in a tax-saving FD, you can visit any public or private bank except for rural and cooperative banks. Some banks even allow you to invest online.
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These FDs can be opened either in a ‘single’ holding or ‘joint’ holding. In the case of investment via joint holding, the tax benefit accrues only to the primary account holder. Post office time deposits are transferable from one post office to the other. If you invest in these FDs for five years, you can claim a deduction underSection 80C of the Income Tax Act.It is noteworthy that most banks offer a higher interest rate for senior citizens investing in tax-saving FDs (usually by 0.25% to 0.5%). However, much higher tax-saving interest rates are not applicable in Post Office Time Deposits.
Tax Deducted at Source (TDS): The interest in tax-saving fixed deposits is paid out per month or quarter. You can also choose to reinvest it. The interest so earned is taxable as per the income tax bracket applicable to your taxable income. By submitting Form 15G to the bank, you can avoid paying the TDS. In the case of senior citizens, form 15H can be submitted to the bank.
For individuals, if the total interest earned in a financial year is more than ₹10,000, then TDS becomes applicable. Senior citizens get a deduction of up to ₹50,000 under Section 80TTB of the Income Tax Act.
Documents Required and Eligibility for Tax Saving FD Account
To invest in tax-saving FDs, you need to submit address and identity proof to the bank or post office. Following is a list of documents that you can use to open a tax-saving FD account:
Identity Proof
- Driving License
- Senior Citizen ID Card
- Passport
- PAN Card
- Government ID Card
- Voter ID Card
Address Proof
- Bank Statement
- Passport
- Electricity Bill
- Telephone Bill
- ID Card / Certificate issued by Post Office
- Voter ID Card
Frequently Asked Questions
Is tax-saving FD risky?
Tax-saving FDs are one of the safest investment instruments to reduce your tax liability. The invested amount is protected, the returns are assured, and the interest percentage is also fixed.
To open a Tax Saver FD account, is there a minimum amount criterion?
The minimum amount for a tax saver FD account may vary from one bank to the other.
Can we break tax saving FD?
No. Premature withdrawals of tax-saving FDs are not allowed. According to the Bank Term Deposit Scheme 2006, you cannot break these FDs before the five-year expiry.
Is the interest income free from taxation?
No. Interest on tax-saver FDs that are paid/accrued is fully taxable in the individual’s hands. It gets added to your income, and tax rates applicable to your income slab apply to it as well. If interest payments exceed Rs.10,000 in a financial year across all the bank accounts, then the bank deducts TDS on it at 10%. If the individual fails to show a PAN Card, the rate of tax deduction becomes 20%.
How can I open a tax-saving FD?
You can open a tax-saving FD account with any public sector or private sector bank. If you open your FD in the same bank branch on which you are drawing the cheque, the funds can get transferred from your account within minutes. Some banks even allow you to invest via their net banking facility.
What is the tenure of a tax-saving FD?
The lock-in period or tenure of a tax-saving FD is five years.
Which is better: Tax saver FD or PPF?
It depends on your financial goals. If you are looking to invest for the medium term, tax-saving FDs with a lock-in period of 5 years can be ideal. PPF has a lock-in period of 15 years. They work well if you have a long-term goal in mind.
Tax saver FDs do not give you an option of premature withdrawal or a loan facility. However, PPF allows you both of these features. In case you feel there may arise a financial need in the future for which you might need urgent cash, PPF can be a good option.
Lastly, returns on tax-saving FDs attract TDS, whereas PPF is tax-free. Further, PPF falls under the EEE (Exempt, Exempt, Exempt) tax treatment. Meaning, PPF contribution is eligible for tax deduction under Section 80C of the Income Tax Act. Interest income is exempt from income taxation. At the same time, maturity proceeds are also exempt from taxation.
