Tax saver Fixed Deposit

A tax-saving fixed deposit is a special type of fixed deposit that allows you to grow your savings while also offering tax benefits. Under Section 80C of the Income Tax Act, 1961, you can claim a deduction of up to ₹1.5 Lakhs on your principal investment in a tax-saver FD. 

This makes it a popular choice for those looking to combine the security of a fixed deposit with the advantage of reducing their taxable income. These FDs typically have a fixed lock-in period of 5 years, during which the funds cannot be withdrawn.

Here is an example to help you understand how tax-saver FDs work. Let's say you invest ₹1.5 Lakhs in a tax-saver FD at an interest rate of 6.5% p.a. for a 5-year tenor. Here’s how the investment and interest calculation would work:

• Principal Amount: ₹1,50,000

• Interest Rate: 6.5% p.a.

• Tenor: 5 years

• Compounding Frequency: Annual

Through the below table, you can see how your FD investment will grow throughout the tenor. 

Fixed deposit rates determine how much returns you can earn. Check out the tax-saving FD interest rates from some of the top banks. Note that these interest rates are applicable for a tenor of 5 years.

The parameters and paperwork needed for these investment avenues may vary between banks. Generally, they adhere to certain common parameters, which include:

1. Eligibility Criteria

• Residential status: Resident Indians, including salaried and self-employed individuals

• Age: At least 18 years old

• Investor Type: Individuals and Hindu Undivided Families (HUFs)

2. Documents Required

• Identity proof: Aadhaar card, passport, voter ID, PAN card, and senior citizen identification (if necessary) 

• Address proof: Utility bills, driving licence, voter ID, Aadhaar card, and passport

While the exact process to book a tax-saver FD will vary among different banks, here are some common steps you may have to follow: 

• Choose a Bank: Select a bank that offers tax-saver FDs with favourable interest rates

• Eligibility Check: Ensure you meet the eligibility criteria, such as being an Indian resident or Hindu Undivided Family (HUF) 

• Fill the Application Form: Complete the FD application form, specifying the amount you wish to invest and tenor, which will be 5 years by default for tax-saver FDs 

• Submit KYC Documents: Provide necessary KYC documents, including PAN, Aadhaar, and address proof

• Deposit the Amount: Transfer the amount from your savings account to the FD

• Receive the FD Receipt: After processing, you'll receive an FD receipt, which serves as proof of your investment

Avoiding taxation on fixed deposits involves strategic financial planning. Here are some strategies you could follow:

• Submit Form 15G or 15H

You can submit Form 15G (if below 60 years) or Form 15H (if above 60 years) to the bank to declare that your total income is below the taxable limit. This exempts you from TDS.

• Distribute Investments

Distribute your investments across multiple banks to keep the interest earned from each FD below the threshold. The TDS limit has been fixed at ₹40,000 for the general public and ₹50,000 for senior citizens. 

Before you invest in a this FD, compare it with some of the other top tax-saving options:

When a tax-saving FD matures after its 5-year lock-in period, you have the option to withdraw the maturity amount or reinvest it. The principal and interest are credited to your linked account upon maturity. If you choose to reinvest, you can start a new FD or explore other investment options, but remember that the interest rates and terms may differ. 

Auto-renewal is generally not available for tax-saving FDs, so active reinvestment is necessary. Additionally, consider the ₹1.5 Lakh limit under Section 80C, which covers all eligible tax-saving investments in a financial year. If you’ve already reached this limit, reinvesting in another tax-saving FD won’t offer additional tax benefits. Therefore, assess your 80C contributions and financial goals to ensure that any new investment aligns with your strategy, helping you maximise both tax benefits and returns.

A tax-saving FD offers a secure way to grow your savings while reducing your taxable income. However, the interest earned remains fully taxable. These FDs have a 5-year lock-in period, with no premature withdrawals allowed. When choosing a tax-saving FD, compare different banks to find the best interest rates and terms that align with your financial goals.