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Tax-Saving Fixed Deposit 

A tax-saving fixed deposit, also known as a tax-saver FD, is an investment recognised under section 80C of the Income Tax Act, 1961. Here, much like in the case of any other FD investments, you can invest a lump sum amount of money for a specific tenor. Over this tenor, your deposit earns returns at the tax-saving FD interest rates offered by the bank. 

 

However, there are a few differences between regular fixed deposits and tax-saver FDs. With a tax-saving deposit, you get to enjoy tax benefits up to ₹1.5 Lakhs during the financial year. You can invest in these tax-saving deposits with many leading banks in the country. Many of them offer competitive tax-saving fixed deposit interest rates.

 

Before taking a look at these rates prevailing in the market currently, let’s first get a better idea of the features and benefits of a tax-saver FD.

Features and Benefits of Tax-Saving Fixed Deposit

There are various features and benefits of tax-saving FDs in India. Here are the top advantages and key characteristics. 

 

  • Guaranteed Returns

You can earn guaranteed returns in the form of interest on your tax-saver FD. These returns are unaffected by market fluctuations. 

 

  • Tax Benefits

You can also avail tax benefits of up to ₹1.5 Lakh per financial year on the amount invested in these FDs during the year. This benefit is offered u/s 80C of the Income Tax Act, 1961.

 

  • Lock-In Period

Tax–saver FDs have a lock-in period of 5 years. This is one of the key points of difference between tax-saving deposits and regular FDs.  

 

  • Flexible Interest Payouts

You can choose to receive the interest earned as regular payouts on a monthly or a quarterly basis too. This acts as a reliable source of income over the 5-year tenor. 

 

  • No Premature Withdrawal

You cannot prematurely withdraw the sum in your deposit either partially or completely till the 5-year tenor is complete. 

 

  • Nomination Facility

Tax-saver deposits also give you the benefit of a nomination facility, with which you can assign a nominee to your FD account.

 

  • Joint Account Holding

Tax-saver FDs also offer the option of joint account holding. For joint holders in a tax-saver FD, the tax benefits can be availed only by the first or primary account holder.

 

  • Competitive Interest Rates

Many leading banks offer competitive tax-saving fixed deposit interest rates today. You can compare the interest rates before making a decision about where to open your FD account.

How Do Tax-Saver Fixed Deposits Work?

To better understand how these deposits work, let’s take a look at a couple of hypothetical examples. 

 

Scenario 1: 

Say you have a lump sum amount of ₹1.2 Lakh. You want to invest this sum in a low-risk investment option, and you have no immediate need for this money. So, you decide to lock this sum in a tax-saving fixed deposit for a period of 5 years, in a bank that offers interest at the rate of 6% per annum. 

 

Let’s say you choose to reinvest the interest and receive it at maturity only. In this case, you can invest the entire sum in the tax-saving investment because it is below the maximum investment limit. At the end of this tenor, your investment will grow to ₹1,61,622.60, meaning you will earn around ₹41,622.60 as interest totally.

 

Scenario 2: 

Keeping all other parameters the same, let’s now say you have a lump sum amount of ₹2 Lakh to invest in a tax-saver FD. In this case, you can only deposit up to ₹1.5 Lakh, since that is the maximum limit on the investment amount permitted. 

 

Here, at the end of 5 years, you will earn a total interest of around ₹52,028.25, and the investment will grow to ₹2,02,028.25. 

How to Start a Tax-Saving Deposit

If you think that this investment avenue is a suitable option for you, you can start a tax-saving FD easily online or offline. Here’s a general overview of what you need to do in case you wish to invest in this kind of deposit online if your bank offers this facility.

 

  • Step 1: Log into your bank’s internet banking portal.

  • Step 2: Head to the ‘Deposits’ section.

  • Step 3: Choose the ‘Tax-Saver FD’ option.

  • Step 4: Enter the amount that you wish to invest and click on ‘Invest Now.’

 

On the other hand, if you wish to start a tax-saving FD in-person, you can follow the steps outlined below.

 

  • Step 1: Visit the nearest branch of your bank.

  • Step 2: Ask for the application form for a tax-saving deposit. 

  • Step 3: Fill in the details and submit the form along with any other paperwork needed. 

  • Step 4: Attach a cheque or DD for the investment amount.

 

That sums up how you can invest in this tax-saving investment option in a hassle-free manner. 

Things to Consider Regarding Tax-Saving Fixed Deposits

Before you invest in a tax-saving deposit, you will have to consider the following aspects. That will help you make an informed choice or investment decision. 

 

  • Your Existing Tax Savings

You can only claim a maximum amount of ₹1.5 Lakh u/s 80C from a wide range of investments and expenses such as PPF, NPS, life insurance premiums and home loan EMIs. If you have already maximised your tax savings with one or more of these avenues, investing in a tax-saver FD will not offer any extra tax benefits. 

 

  • Your Financial Goals

Keep your financial goals in mind and ensure that their time horizon aligns with the lock-in period of your tax-saver FD, i.e. 5 years. If you are investing in a 5-year FD for a goal that is 2 to 3 years away, there is scope for better planning. 

 

  • Your Nominee

A tax-saver FD is a mid-term investment option, but 5 years can still be a long time. So, if you decide to open invest in this kind of deposit, make sure you assign a nominee to your fixed deposit account. This will make it easier for your family to access the benefits in case something untoward happens to you. 

 

  • The FD Interest Rate

Lastly, also consider the tax-saving FD interest rates offered by different banks before you make an investment decision. You can compare the rates offered by different banks before making a choice. 

Non-Senior and Senior Citizen Tax Saver FD Interest Rates

Here is a preview of the tax-saving FD rates offered by different banks in the current market. Check out the details to make a more informed investment decision.

Bank

Tax-Saving FD Rate for Non-Senior Citizens 

Tax-Saving FD Rate for Senior Citizens 

State Bank of India 

5.85% per annum

6.65% per annum

ICICI Bank

6.20% per annum

6.70% per annum

HDFC Bank

6.10% per annum

6.60% per annum

Punjab National Bank

5.80% per annum

6.30% per annum

Axis Bank

6.10% per annum

6.85% per annum

Bank of Baroda

5.65% per annum

6.30% per annum

Union Bank of India

6.70% per annum

6.70% per annum

Conclusion 

Now that you know what tax-saver fixed deposits are and how they can benefit you, it is easier to make a prudent investment decision. Ensure that you use this investment avenue to your advantage to earn guaranteed returns as well as save tax in the process.

FAQs

  • ✔️What happens to the amount when a tax-saving FD matures?

    Once your tax-saving FD matures, the maturity amount, which includes the principal and the interest, is directly transferred to your linked bank account.

  • ✔️What is the minimum tenor of tax-saving fixed deposits in India?

    Tax-saving fixed deposits in India have a lock-in period of 5 years.

  • ✔️What are the risks involved in a tax-saving FD?

    The returns from a tax-saving FD are not influenced by the market fluctuations. So, tax-saver FDs are fairly risk-free. The amount invested is protected by the financial institution, while you enjoy stable returns at the predetermined tax-saving FD rates.

  • ✔️What are the minimum and maximum amounts one can deposit in a tax-saving FD?

    The minimum deposit amount in a tax-saving FD varies according to the terms and conditions of the financial institution. However, you can deposit a maximum of ₹1.5 Lakhs in a financial year.

  • ✔️Can we break a tax-saving FD?

    No, you cannot break or prematurely withdraw a tax-free FD. The investment remains locked in for the tenor of 5 years.

  • ✔️Which is better: An FD or a tax-saving FD?

    That depends entirely on your financial goals and needs. In case you are looking for a safe investment option that offers more liquidity, a regular fixed deposit will be suitable. On the other hand, if you want a safe investment option that helps you save tax, a tax-free FD will be a better choice.

  • ✔️Is premature withdrawal allowed in tax-saving FD?

    No. Premature withdrawals are not allowed for tax-saving fixed deposits.

  • ✔️Who can invest in a tax-saving FD?

    Individuals and Hindu Undivided Families (HUFs) are eligible to invest in tax-saver FDs.

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