Tax Saving FD Interest Rates 2023

As the name suggests, tax savings FDs are fixed deposit schemes that allow you to save on taxes. As per Income Tax rules, investments up to ₹1.5 lakhs to this scheme are tax-deductible under Section 80C of the Income Tax Act, 1961.

At the core, a tax saving and a regular FD are similar. For instance, both allow you to invest for a fixed tenure at fixed interest rates, and the returns come from the interest income. The main difference here lies in the tax benefits offered by each. While the standard FD scheme does not provide tax benefits, it gives investors a choice to pick a tenure between six months to ten years. On the other hand, a tax-saving FD, despite its tax-saving advantages, comes with a lock-in period of five years.

Nevertheless, the interest income in both these instances is taxable in your hands. So, before you decide which one to pick, it is crucial to understand tax-saving FD interest rates in 2022.

What are Tax Saving FDs?

Regular Fixed Deposit – FD is a savings scheme offered by banks, post offices and NBFCs where your money is held for a fixed tenure, earning interest at a fixed interest rate throughout the term. The lock-in period of a standard FD is the same as the deposit tenure, meaning that you cannot withdraw before maturity and for premature withdrawal penalty is levied  

Tax Saving FD – You cannot claim tax deductions on your investments in regular FDs. However, in the case of tax-saving FDs, investments up to ₹1.5 lakh benefits are tax-deductible under section 80C of the Income Tax Act, 1961. This marks the main difference between a standard and a tax-saving FD scheme. There are other differences too. Let us have a look.

To qualify for tax benefits, you must invest between ₹1 lakh and ₹1.5 lakh for a fixed five-year period. In contrast, the minimum investment amount for a regular FD varies across financial institutions. For instance, SBI allows you to open an FD with a deposit as low as ₹1000. Conversely, you need to invest a minimum of ₹5000 to have an FD account with Axis Bank.

A standard FD offers better liquidity than a tax-saving FD, but the latter comes with substantial tax benefits. So, both have their merits and demerits and whether you want to opt for a tax-saver FD depends on your investment goals and financial needs. With this in mind, let us explore the tax-saving FD interest rates, their features, eligibility criteria and more.

Also Read: FD Interest Rates: All You Need to Know

Top 10 Tax-Saving Fixed Deposit Schemes in India

Below are some top tax-saving FD rates offered by banks. These rates are updated as of September 20, 2022.

BankInterest Rates (Regular Public)Interest Rate (Senior Citizens)
State Bank of India5.40%5.90%
Kotak Mahindra Bank5.30%5.80%
HDFC Bank5.30%5.80%
Punjab National Bank5.25%5.95%
IDFC Bank5.25%5.75%
Deutsche Bank6.25%6.25%
Axis Bank5.75%6.25%
DCB Bank5.95%6.45%
Bank of Baroda5.25%5.75%
Lakshmi Vilas Bank5.75%6.25%

Eligibility Criteria for Tax Saving Fixed Deposit

Indian citizens above the age of 18 years and the Hindu undivided families (HUFs) are eligible to invest in a tax-saving FD. Further, these accounts can also be opened by an individual jointly with their minor ward.

Also Read: Tax-Saver FDs in India: Get Tax Deductions Under Section 80C

Documents Required for Opening Tax Saving FD Account

Below is a list of documents required to open a tax-saving FD:

  • Valid ID proof like Aadhar card, PAN card, voter ID card, passport etc.
  • Valid address proof like Aaddhar card, voter ID card, passport, utility bills etc.
  • Two passport-sized photographs.
  • A duly-filled account opening form.

Know 5 important things about 5-year tax saving FD interest rates

  1. Lock-in Period

These FDs come with a lock-in period of five years. As with a regular FD, the interest rate on five-year tax saving FD remains unchanged for the entire tenure. However, premature withdrawal is not allowed. So, funds cannot be liquidated, and your money remains invested in the scheme for the complete tenure.

  1. Interest Rates

Tax-saving FDs offer interest rates similar to regular FDs, with higher rates for senior citizens.

  1. Tax Exemption

You can claim tax deductions on investments up to Rs.1.5 lakh to this scheme. However, the interest income will remain taxable per your tax bracket.

  1. Loan Facility

The loan facility is not available under tax-saving FDs. Hence, unlike a standard FD that can be used as collateral to secure loans, these FDs do not offer such benefits.

  1. Auto-renewal

The deposits in these accounts cannot be auto-renewed upon maturity.

Tax Deductions For Reinvestment Fixed Deposits

Under the tax-saving FD, you can choose interest payout terms at your convenience. These FDs come in two primary forms – cumulative and non-cumulative. In the cumulative tax-saving FD, the interest income is compounded periodically and reinvested into the corpus. Compounding ensures that you earn interest on the interest. The principal, along with interest, is paid to you on maturity. In non-cumulative FDs, on the other hand, you receive interest payouts periodically, either annually, bi-annually, quarterly or monthly.

In this case, cumulative FD qualifies as a reinvestment fixed deposit. Investments of up to ₹1.5 lakhs in this scheme are eligible for tax deductions under section 80C of the IT Act of 1961.

Final Thoughts 

Tax-saving FDs are ideal when it comes to appreciating your capital and while you are at it, save some tax as well. What helps here is the fact that five-year tax-saving FD interest rates are similar to regular FD interest rates. However, not everything about these FDs is appealing. For example, if you want to liquidate the FD funds for an emergency or use it as collateral for a loan, then the tax-saving deposit will not help. On the other hand, if you invest to save taxes, these FDs are an excellent choice. So, assess your goals and cash-flow requirement

FAQs

Are all five years tax-free in tax saver FDs?

Tax-saving FDs are not tax-free. Instead, they offer tax benefits. Deposits up to Rs.1.5 lakhs to this scheme are tax-deductible under section 80C of the Income Tax Act of India, 1961. However, the interest income from such FDs will be taxed in your hands.

What is the difference between a standard FD and a tax saver FD?

The main difference between the two is the tax-saving component. Tax-saving FDs come under section 80C of the income tax act, while regular FDs don’t. Furthermore, regular FDs are much more flexible. They have terms ranging from 7 days to even a decade, while the tenure for tax-saving FDs is fixed at five years. Moreover, regular FDs allow premature withdrawal, but tax-saving FDs don’t.

Which is better, tax saver FD or PPF?

Both tax saver FD and PPF are investment options covered by section 80C of the Income Tax Act. Both schemes offer you a tax rebate for investments up to Rs.1.5 lakh. But the PPF lock-in period is 15 years, while for tax-saving FDs, it is five years. Further, PPFs offer a higher interest rate than FDs. The decision to choose either of the two schemes – tax-saver FD or PPF – should depend on your goals and preferences.

Can I withdraw tax saver FD prematurely?

You can withdraw tax saver FDs only after the lock-in period of five years. Unlike regular FDs, there is no option for premature withdrawal. Hence, it is crucial to understand that the funds cannot be liquidated before five years, either wholly or partially, before you invest in the scheme.

What are cumulative and non-cumulative FDs?

Cumulative FDs reinvest the interest to the corpus, paying you the interest at the end of the maturity period. Non-cumulative FDs provide periodic interest payouts. Either way, it is up to you to decide which option to choose.

Can both account holders for a jointly held tax-saver FD avail of tax benefits?

No, if the holding of the account is joint, only the first holder is eligible for tax benefits.

Investments Principal at Wint Wealth

Anuj is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.Com (Hons) in St. Xavier’s College, Kolkata and holds PGDM (Finance) degree from GIM. He is currently working as Investments Principal at Wint Wealth. He has been working in the debt capital market space for the past 4+ years and is also an NISM certified mutual fund expert.

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