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Tax Saver FD

Updated on: 21 Dec 2023 | 8 min read

For risk-averse people, fixed deposits are a good way to put aside a certain amount of money for a fixed tenure and earn guaranteed returns. You can open a fixed deposit account with as little as Rs.1000 and choose a term starting from 7 days. The interest income depends on the financial institution you decide to open an account with and usually starts from 3% per annum.

Another advantage of fixed deposits is the possibility of saving on taxes. There are tax saver FDs that help you save tax on the amount you invest. You can claim a deduction on your investment to lower your taxable income. As your taxable income reduces, so does your tax liability.

Let’s learn more about tax saving fixed deposits.

What are Tax Saver FDs?

Tax-saver FDs are a type of fixed deposit scheme that help you save taxes. These fixed deposit schemes have a tenure of five years and allow you to claim a tax deduction on the amount you invested under section 80C. You can claim a deduction of up to Rs.1.5 lakhs under section 80C of the Income Tax Act, 1961, when you invest in tax saving FD accounts.

While the tenure is fixed for five years, there is no cap on the amount you wish to invest. The tax deduction, however, is only up to Rs.1.5 lakhs. It should be noted that this tax-benefit is only applicable to the invested amount and not the interest income, which remains taxable.

Further, the tax-saving FD interest rates are usually in the range of 5.5 – 7.75%.

Features of Tax Saving FDs

The salient features of tax-saving FDs are as follows –

  • The money that you deposit remains invested for five years with no option for premature withdrawal.
  • The rate of interest, once fixed, does not change during the deposit tenure
  • If you are a senior citizen, you can enjoy higher interest rates.
  • Tax Saving FDs do not have an automatic renewal option.
  • TDS (10%) would be applicable if the aggregate interest income exceeds Rs.40,000. However, if your taxable income falls below Rs.2.5 lakhs, you can claim an exemption from TDS by submitting Form 15G/15H
  • For senior citizens, interest income up to Rs.50,000 would be tax-free under section 80TTB.
  • You cannot avail of a loan against the mortgage of these fixed deposits
  • You can open the fixed deposit account jointly. However, the tax benefit would be available only to the first holder.
  • You can open a tax-saving FD account in the majority of public and private sector banks, including Post Offices.

Benefits of Tax Saving FDs

The 5 year tax saving fixed deposit schemes have multiple benefits over other schemes and investments. These benefits are:

  • Tax benefit
    The primary benefit of a tax saver FD scheme is its tax advantage. You can claim a deduction up to Rs.1.5 lakhs on your deposit amount to reduce your taxable income. If you fall in the 30% tax bracket, you save Rs.45,000 in taxes.
  • Guaranteed returns
    Fixed deposit schemes offer guaranteed returns on your investment. Once fixed, the tax-saving FD interest rates do not change, allowing you to enjoy safe returns every year. Moreover, the returns compound every time they are declared, giving you higher returns in subsequent years, so you amass a decent corpus.
  • Safe investment avenues
    Tax-saving fixed deposits are not linked to market-securities, so they offer safety against volatility. Even if the market falls or suffers a crash, tax saving fixed deposit rates remain secured and fixed.
    Moreover, with bank deposits, you also enjoy an insurance cover up to Rs.5 lakhs. This means that deposits up to Rs.5 lakhs are secured even if the bank ceases operations.
  • Additional benefits for senior citizens
    Senior citizens get to enjoy additional benefits with 5-year tax-saving fixed deposit schemes. For starters, tax-saving fixed deposit interest rates are higher for senior citizens. Secondly, they enjoy tax-free returns up to Rs.50,000, giving them dual tax benefits during investment and redemption.
  • Affordable and simple investments
    Tax-saver FDs are an affordable option that can start with an investment as low as Rs.1000. However, the minimum investment amount is different in each bank. Moreover, with online investment facility offered by most institutions, you can open an account quickly and conveniently.
  • Helps plan for your financial goals
    With the guaranteed corpus that the saving fixed deposit promises, you can plan ahead for your mid to long-term financial goals.

Documents Required for Tax Saving FD Account

Individuals, senior citizens and Hindu Undivided Families (HUFs) can open a tax-saving FD account. You must submit a set of documents for the financial institution to authenticate and verify your identity and carry out the KYC compliance norms.

The documents required include the following –

 

Valid identity proof

  • Aadhaar Card
  • Driving Licence
  • Passport
  • PAN Card
  • Voter ID Card
  • Any other ID card containing your photo and issued by a recognised institution
     

Valid address proof

  • Aadhaar Card
  • Driving License
  • Passport
  • Voter ID Card
  • Property Deed
  • Rent agreement
  • Latest utility bills
  • Bank statement
    You should self-attest the copies of your identity and address proof. The financial institution may ask to see the original documents too.

Things to consider while investing in Tax-Saving FD

While you might find the tax-saving FD to be the right investment avenue for your savings, here are a few things that you should know when you invest –

  • Minors can open a tax-saving FD account jointly with an adult. The adult would be the primary account holder eligible to claim tax deductions.
  • The minimum amount required for the deposit varies across banks and post offices. Some banks might even allow a minimum investment of Rs.1000. Find out the minimum investment required when you decide to invest in these FDs
  • There is no maximum limit on investments. However, the tax benefit is available only on a maximum investment of Rs.1.5 lakhs. If you invest a higher amount, the excess would be considered a part of your taxable income and will be taxed at your tax-slab rate.
  • You cannot make partial withdrawals from your deposit during the lock-in period of five years.
  • You should nominate a family member to receive the maturity amount in the case of your sudden demise.
  • If your interest income is exceeding Rs.40,000, it is eligible for taxation. However, if your annual taxable income is below Rs.2.5 lakhs, submit Form 15G or 15H to the bank or post office to claim TDS exemption.

Conclusion

If you are looking for a fixed-income investment avenue offering tax benefits, you can go for a five-year fixed deposit scheme. You can avail the dual benefit of creating a secured corpus while enjoying tax relief. Compare the deposits by different banks to get the highest interest rate on your investments. Plan your mid to long-term financial goals with the promise of guaranteed returns.

FAQs

How much tax deduction can I claim with tax-saving FDs?

You can claim a maximum tax deduction of Rs.1.5 lakhs under section 80C of the Income Tax Act, 1961, although you can deposit more than Rs.1.5 lakhs.

Is premature withdrawal allowed in tax-saver FDs?

No, income-tax saving fixed deposits have a mandatory lock-in period of five years. You cannot opt for premature withdrawals during this lock-in period. The money, once deposited, would mature only after the specified tenure comes to an end.

Is there any risk in tax-saving FD?

Regarding investment risks, there is no risk in tax-saving FD since the returns are guaranteed irrespective of market movements.
However, there are two types of risks that tax-saving FDs carry. One is the inflation risk – the risk of inflation surpassing the promised interest rate. If the inflation exceeds the interest, the inflation-adjusted return becomes negative. The second is the interest rate risk which means the risk of rising interest rates after you have invested in the FD at a lower interest rate.

What happens when tax-saving FD matures?

After the FD matures, you get back the principal and the interest earned thereon. You can either withdraw the amount in cash or get it credited to your savings account.
The interest you earn from the deposit is added to your taxable income and taxed at your slab rate after the deposit matures. If you are a senior citizen, you get tax-free returns on maturity up to Rs.50,000.

Who should invest in Tax-saving FD?

Tax-saving FDs are suitable for investors looking for fixed-term investments with guaranteed returns and tax benefits. If you want to save for up to five years and want the benefits of tax savings and guaranteed returns, you can invest in these schemes.

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