A tax-saving fixed deposit, or 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 based on the 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 can enjoy tax benefits of 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 tax-saving fixed deposits with attractive interest rates.
Read on to get an overview of the prevailing rates, features and benefits of a tax-saver FD.
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Here is a preview of the tax-saving FD rates offered by different banks as of February 2023. 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 |
6.5% per annum |
7% per annum |
|
7% per annum |
7.5% per annum |
|
7% per annum |
7.5% per annum |
|
6.5% per annum |
7% per annum |
|
7% per annum |
7.5% per annum |
|
6.25% per annum |
6.90% per annum |
Many small finance banks also provide tax saver FDs. Check out the table to understand the current FD rates offered by a few small finance banks.
Bank |
FD Rates for Senior Citizens |
FD Rates for Non-Senior Citizens |
AU Small Finance Bank |
7.70% p.a. |
7.20% p.a. |
Suryoday Small Finance Bank |
7.75% p.a. |
7.50% p.a. |
Ujjivan Small Finance Bank |
7.70% p.a. |
7.20% p.a. |
Unity Small Finance Bank |
8.15% p.a. |
7.65% p.a. |
Utkarsh Small Finance Bank |
8.25% p.a. |
7.50% p.a. |
Apart from investing in fixed deposits, there are numerous other investment options for saving tax. Here is a quick rundown of different tax-saving investment strategies you need to know.
Name of the Investment |
Lock-in Period |
Tax on Returns |
Tax saver FD |
5 years |
Yes |
NPS |
Until retirement |
Partially taxable |
PPF |
15 years |
No |
ELSS |
3 years |
Partially taxable |
NSC |
5 years |
No |
There are various features and benefits of tax-saving FDs in India. Here are the top advantages and key characteristics.
Market fluctuations do not affect the interest rates of tax-saver FDs and hence, you can earn stable returns.
You can also avail of tax benefits of up to ₹1,50,000 Lakhs every financial year on the amount invested in these FDs during the year. This benefit is offered u/s 80C of the Income Tax Act.
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.
You cannot prematurely withdraw the sum in your deposit either partially or completely till the 5-year tenor is complete.
These deposits also give you the benefit of a nomination facility, with which you can assign a nominee to your FD account.
Tax-saver FDs also offer the option of joint account holding. However, note that the tax benefits can be availed only by the first or primary account holder in a tax-saver FD.
Many leading banks offer competitive tax-saving fixed deposit interest rates today. You can compare the rates and choose the one that offers the best benefits and returns.
As per the Income Tax Act 1961, you can claim deductions of up to ₹1.5 Lakhs on tax-saving FDs. This amount gets deducted from the total gross income to calculate taxable income.
Some of the criteria that you need to fulfil to claim the deduction are:
Only HUFs and individuals are eligible to invest in a tax-saving FD scheme
The FDs can have the minimum investment amount as mentioned by the financial institution or bank
Tax-saving FDs have a lock-in period of 5 years
Loans against FD or premature withdrawals are not permitted
People may invest in these FDs through any private or public banks, except rural or cooperative banks
The 5-year Post Office Time Deposit is also eligible for tax deductions u/s 80C of the IT Act of 1961
FDs can be either held jointly or individually
In the case of a joint FD, the tax deductions will only apply to the primary holder of the FD
Tax deductible FDs have the facility for nomination
The interest from this FD is subject to TDS and tax rate as per your tax bracket
Interest is paid is either done on a quarterly or monthly basis
As a matter of fact, you cannot completely avoid tax deducted at source on tax-saving FDs, but there are some ways to minimise the tax. Some of them are:
You can eliminate TDS on tax-saving FDs if your annual income is below ₹2.5 Lakhs. You can complete Form 15G and submit it to the bank. This form proves that your annual income is below the limit for tax and that you do not have to pay tax.
This form is for individuals over 60 whose annual income does not exceed ₹2.5 Lakhs a year. Elderly citizens can use this form to exempt themselves from tax claims for their fixed deposits.
Investing in a tax-saving FD jointly is another way to avoid taxes. For joint applications, the tax is waived for the second holder. However, the benefits for tax are only available to the first account holder for joint tax-saving FDs.
Here are some hypothetical examples to better understand how these deposits work.
Say you have a lump sum amount of ₹1.2 Lakh. You want to invest this sum in a low-risk investment option and do not need this money immediately.
So, you decide to lock this sum in a tax-saving fixed deposit for 5 years in a bank offering interest at the rate of 6% per annum. Assume 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. Hence, at the end of this tenor, your investment will grow to about ₹1.60 Lakhs, and you will earn around ₹41,622.60 as interest total.
Keeping all other parameters the same, consider you have a lump sum amount of ₹2 Lakhs to invest in a tax-saver FD. In this case, you can only deposit up to ₹1.5 Lakhs since that is the maximum limit on the investment amount permitted.
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.
If you think this investment avenue is a suitable option, 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 net 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 hassle-free.
Before investing in a tax-saving deposit, you must consider the following aspects. This helps you make an informed choice or investment decision.
You can claim only up to ₹1.5 Lakhs u/s 80C for a wide array of investments and expenses such as NPS, PPF, life insurance premiums and home loan EMIs. However, if you have already maximised your tax savings with these investment avenues, parking your funds in a tax-saving fixed deposit will not offer any extra tax benefits.
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.
A tax-saver FD is a mid-term investment option, but 5 years can still be a long time. So, if you decide to 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 your absence.
Lastly, take into account the interest rates different issuers offer before making an investment decision. This will allow to choose an option that not only helps you save tax but also ensures that you get the best returns.
Here are the eligibility parameters when booking your tax-saving fixed deposits:
You must be a resident Indian
An individual or a member of HUF (Hindu Undivided Family) can open this FD
You can book an individual or a joint account
You must provide address and identity proof when booking a tax-saving FD in post offices and banks. Submit the following documents for address and identity proof:
PAN card
Passport
Driving licence
Voter identification card
Senior citizen identification card
Government identification card
Telephone bill
Passport
Bank Statement with a cheque
Electricity bill
ID card/Certificate issued by the Post office
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.
You can use the online FD interest rate calculator on Bajaj Markets to find out the amount that your investment will amass over time.
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Once your tax-saving FD matures, the maturity amount, which includes the principal and the interest, is directly transferred to your linked bank account.
Tax-saving fixed deposits in India have a lock-in period of 5 years.
Market fluctuations do not impact the returns from a tax-saving FD, making them fairly risk-free. The amount invested is secure with the financial institution, while you enjoy stable returns at the predetermined tax-saving FD rates.
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.
No, you cannot break or prematurely withdraw a tax-free FD. The investment remains locked in for a tenor of 5 years.
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.
No. Premature withdrawals are not allowed for tax-saving fixed deposits.
Individuals and HUFs (Hindu Undivided Families) can invest in tax-saver FDs.
Yes, it is. However, tax-saving FDs have a lock-in period of 5 years.
Various banks offer different interest rates on tax-saving FDs. For instance, DCB Bank offers 7.6% p.a., while the SBI provides an interest rate of up to 6.5% p.a. You can choose a plan after comparing various interest rates and the returns you earn, depending on your financial goals.