How Can Tax Saving Fixed Deposits Help You Save on Taxes?

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Find out what a Tax Saving FD is, its unique features and why should you invest in it.

Key Takeaways

• A Tax-Saving Fixed Deposit is a special type of FD offered by the Indian Government.
• You can avail of tax deductions under section 80C of the Indian Income Tax Act, 1961 by investing in this FD.
• The maximum amount you can invest is INR 1.5 lakhs per annum.
• Tax Saving FDs come with a lock-in period of 5 years.
• You can earn interest rates of 5.5% to 7.5% on Tax-Savings FDs.

Almost every bank in India offers Fixed Deposits wherein an investor can invest any big or small amount for a fixed period and get a fixed rate of return out of it. The interest rate ranges between 3% and 7.75% per annum, and you have to pay taxes on the returns accrued from your regular Fixed Deposits. However, the Government of India also offers Tax-Saving Fixed Deposits with significantly higher interest rates. Let us find out more about Tax-Savings FDs in this article.

What is a Tax-Saving Fixed Deposit?

Tax-Saving Fixed Deposit is a type of Fixed Deposit under which you can avail of tax deductions under Section 80C of the Indian Income Tax Act, 1961. You can claim the Fixed Deposit income tax exemption on investments of up to INR 1.5 Lakhs. Unlike a regular FD, which comes with varying lock-in tenures, a Tax-Saving Fixed Deposit comes with a lock-in period of five years. You can also earn higher interest rates ranging from 5.5% to 7.75% on these deposits.

While it is a tax-saving deposit, the interest earned on it is subject to Tax Deducted at Source. You can, however, avoid the TDS by submitting the relevant 15G or 15H Form.

Features of Tax-Saving Fixed Deposits

The following are some of the principal features of Tax-Saving FDs

• The minimum amount you can deposit in a Tax-Saving FD is INR 1,000, whereas the maximum amount is INR 150,000 per annum.
• The FD comes with a lock-in period of five years.
• You can assign a nominee to this investment.
• You can avail of monthly or quarterly payout on these FDs.
• You cannot withdraw the FD prematurely or use the FDs to apply for loans.

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Tax-Saving FD Eligibility Criteria:

• All Individuals and HUFs are eligible to invest in the Tax-Saving Fixed Deposit scheme.
• You can invest in the FD individually or jointly with another adult. However, only the first holder can avail of the tax benefit.
• Minors can also invest in this FD, but it should be a joint FD account with an adult.

Documents Required

You only need to provide a copy of your ID and address proof documents to open a Tax-Saving Fixed Deposit. These include:

• A copy of identity proof – PAN card, Aadhaar, Voter ID card, Driving license, Passport, Government ID card, Senior Citizen Card, etc.
• A copy of address proof – Aadhaar, Voter ID card, Driving license, Passport, Utility bills, etc.

Why invest in Tax Saving FDs?

The following are some reasons why you should invest in a Tax-Saving FD.

High returns

Tax-Savings FDs have a great interest-earning potential as compared to other instruments. The interest rate can be in the range of 5.5% and 7.75%.

Convenient

You can conveniently open this FD online with your bank or visit a post office to open it and make a one-time lump sum deposit. Additionally, you can flexibly invest anywhere from INR 1,000 to INR 1.5 Lakhs per annum.

Tax savings

The most attractive benefit of the Tax-Saving FD is that it comes under Section 80C instruments, on which you can avail of tax deductions of INR 1,50,000. If you have not invested in any other tax-saving instrument, you can consider this.

Risk-free

Tax-Saving Fixed Deposits are risk-free as the principal amount is protected. You get both the principal investment amount and the interest amount when the FD matures.

Low Minimum Deposit Requirement

The low minimum deposit requirement of tax-saving FDs is one of their main benefits. This opens them up to investors with tight budgets. Tax-saving FDs let you start investing with a smaller sum than other tax-saving instruments that could have higher minimum investment requirements.

Joint Holding and Nomination Facility

Tax-neutral FDs frequently permit joint holding, allowing several people to make investments in one account. Families and couples can especially benefit from this. You can also designate a beneficiary who would get the FD's proceeds in the event that you pass away too soon. This guarantees that your assets are safeguarded and bequeathed to your dear ones.

Few Considerations

• Risk vs. Returns: Tax-saving FDs have lower returns but also a lower risk than equity investments. When choosing your pick, take your investing objectives and risk tolerance into account.
• Devise a Tax Strategy: Tax saving FD is just one of your options when it comes to tax planning. Examine additional choices such as PPF and ELSS in order to develop a comprehensive and varied tax-saving plan.
• Tax Implications on Interest: Your income tax bracket will determine how much interest you pay on tax-saving FDs. Take the tax impact into account when figuring out your total returns.
• Liquidity Considerations: Five years is the lock-in period for tax-saving FDs. Make sure you won't require the money you invested during this time.
• Assess Your Financial Goals: Make sure the term of tax-saving FDs aligns with your investment horizon and financial objectives. If you require more potential returns or shorter-term liquidity, consider other investment options.

Advantages of Tax Saving Fixed Deposits Compared to Other Section 80C Investments

Tax-saving fixed deposits offer several advantages compared to other Section 80C investment options:

• • Guaranteed Returns: FDs provide a guaranteed return, making them a relatively safe investment option.
  • Lower Risk: Compared to equity-linked investments like ELSS, FDs are less risky.
  • Ease of Investment: FD accounts are easy to open and manage, with minimal documentation requirements.
  • Flexibility: Some banks offer flexible FD options with partial withdrawal facilities.
  • Loan Against FD: You can avail a loan against your FD if you need funds without breaking the deposit.

Who Should Invest in a Tax Saving FD?

Tax-saving FDs are suitable for individuals who:

• Want to reduce their taxable income.
• Have a moderate risk appetite.
• Prefer a safe and secure investment option.
• Need a regular stream of income (with monthly interest payout options).
• Have a medium to long-term investment horizon (5 years).

How Much Should You Invest Under the Tax Saving FD Scheme? What Will Be the Maturity Amount?

The maximum amount you can invest in a tax-saving FD under Section 80C is Rs. 1.5 lakhs per financial year. The maturity amount of your FD will depend on the interest rate offered by the bank and the tenure you choose. You can use an FD calculator to estimate your potential returns.

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Conclusion

The 5 years Tax-Saving Deposit is an excellent investment option you should consider if you prefer to invest in safe investment instruments. With this investment, you can get tax savings benefits along with relatively high returns and a medium lock-in period. The fixed deposit tax exemption and high-interest rate make this instrument a risk-free and convenient investment option.

If you prefer to save time and effort, and open an FD account remotely, then download DBS Bank app right away!

Frequently Asked Questions (FAQs)

1. Is 5-year FD tax-free for 5 years?

   No, there is no automatic tax exemption for a 5-year FD. Tax benefits are only available for tax-saving fixed deposits that are specifically created under Section 80C of the Income Tax Act.

2. Which FD is eligible for 80C?

   There are tax advantages for fixed deposits that are designated as "Tax Saving FDs" or "Section 80C FDs." Usually, these FDs have a five-year lock-in duration.

3. Is 10-year FD taxable?

   The taxability of a 10-year Fixed Deposit (FD) depends on whether it's a standard FD or a tax-saving FD. For a standard FD, the interest earned is taxable and will be added to your income, with taxes applied according to your income tax slab. However, if you invest in a tax-saving FD, the interest is tax-exempt up to a specified limit, offering you potential tax benefits while you grow your savings.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.