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Tax Saving Fixed Deposit

Updated on: 24 Jan 2024 | 10 min read

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 allows investors 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 2023-24.

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 a penalty is levied for premature withdrawal.
  • 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.

Top 10 Tax-Saving Fixed Deposit Schemes in India

Below are some of the top 5-year tax-saving FD rates offered by banks in India.

Name of the Tax Saving FDFor General Citizens (p.a.)For Senior Citizens (p.a.)
SBI Bank Tax Saving FD6.50%7.50%
IndusInd Bank Tax Saver Scheme7.25%7.75%
HDFC Bank Tax Saving FD7%7.50%
Canara Bank Tax Saving FD7%7.50%
Axis Bank Tax Saving FD7%7.75%
Bank of Baroda Tax Saving FD6.50%7.15%
IDFC First Bank Tax Saving FD7.50%8%
Union Bank of India Tax Saving FD6.70%7.20%
PNB Tax Saving FD6.50%7% 
IDBI Bank Tax Saving FD6.50%7%

 

Note: The FD interest rates are subject to change.

Benefits of Tax-Saving Fixed Deposits

A fixed deposit account is a financial tool the general population has trusted over the decades regarding savings. Since it is a bank-based investment product regulated by the RBI, investors are assured of its safe and low-risk nature. The money deposited is easily redeemable with interest upon maturity.

 

The benefits of a 5-year tax-saving FD are as follows:

  • FDs ensure safe and low-risk investments monitored by RBI.
  • Offers higher interest rates compared to savings accounts.
  • Allows a one-time lump sum deposit.
  • Interest earned on FDs is subject to TDS.
  • The minimum tenure for tax benefits is five years, which can also be extended.
  • Offers flexibility in deposit amounts based on investor convenience.
  • Provides income tax deductions up to Rs. 1,50,000 per annum under Section 80C.

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.

Documents Required for Opening Tax Saving FD Account

Following is a list of documents required to open a 5-year 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.

Points to Remember Before Investing in 5-year tax saving FD

Before investing in 5-year tax-saving FDs, it is essential to consider the following points:

  • Lock-in Period: These FDs come with a lock-in period of five years. As with a regular FD, the interest rate on a 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.
  • Interest Rates: Tax-saving FDs offer interest rates similar to regular FDs, with higher rates for senior citizens.
  • 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.
  • 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.
  • 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.

Comparison With Other Tax-Saving Investments

Beyond fixed deposits, various tax-saving options help accumulate wealth, including ELSS mutual funds, PPF, and NSC. While FDs provide safety amid market volatility, ELSS offers tax-free, higher returns with a 3-year lock-in period, making it a sought-after investment choice.

The following table will help you understand the returns offered and taxation of the various investment options.

 

Investment OptionInterest RateTenureTaxation on Returns
ELSS12% - 15% (Market-linked)3 yearsPartially Taxable
PPF7% to 8%15 yearsTax-free
Tax-saver FDs5% to 7%5 yearsTax-free
NSC6% to 8%5 yearsTaxable
NPS8% to 10%Until RetirementPartially Taxable

Final Thoughts

Tax-saving FDs are ideal for appreciating your capital; while you are at it, save some tax. What helps here is that five-year tax-saving FD interest rates are similar to regular FD interest rates. However, only some things about these FDs are appealing. For example, if you want to liquidate the FD funds for an emergency or use them as collateral for a loan, 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 requirements.

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 a tax rebate for investments up to Rs.1.5 lakh. But the PPF lock-in period is 15 years, while it is five years for tax-saving FDs. 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 can only be liquidated after five years, wholly or partially, before investing 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.

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

An investor can claim a deduction of a maximum of Rs.1.5 lakh per annum by investing in a tax-saving fixed deposit account.

What happens when tax-saving FD matures?

Once the FD matures, the maturity amount will be credited to your source account automatically.

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