Individuals have their preferences when it comes to savings. An investor’s choice of saving instruments depends on the desired amount he/she wishes to save, risk appetite, the purpose of saving, and the time horizon for the same. One of the popular choices in this regard is a tax-saving fixed deposit (FD) since it offers tax benefits alongside stable returns regardless of market fluctuations.

What is a Tax Saving FD?

A tax-saving fixed deposit is a type of fixed deposit that extends tax deductions under Section 80C of the Income Tax Act, 1961. Investors can claim a tax deduction of up to Rs 1.5 lakh per annum through this instrument.

Additionally, it is important to note that these fixed deposits are the same as any other bank FD. However, in addition to general fixed deposit accounts, banks offer a 5-year FD scheme specifically for the purpose of tax saving.

Features of Tax Saving FDs

These fixed deposits have a number of features and benefits, a few of which are highlighted below:

While the rate of interest with regular FDs and tax-saving FDs are more or less similar, the interest rate is higher than a savings account.
Interest earned on tax-saving fixed deposits is taxable.
These fixed deposits have a minimum lock-in period of five years, which individuals can extend for a longer tenure as well.
The minimum amount that can be deposited is Rs 1,000 (in multiples of Rs 100).
The maximum deposit amount is Rs 1.5 lakh in a financial year (and in multiples of Rs 100).
These can be booked with quarterly, maturity, half-yearly or monthly payout.

Who is eligible to invest?

People who are from the following can invest:

Resident individuals and
Hindu Undivided Families

The above-mentioned individuals can open a tax saving FD with a bank or post office, or sometimes even with a non-banking financial company.

Points to Remember Before Investing in Tax Saving FD

Given the features and benefits of a tax saving fixed deposit, it can be enticing for risk-averse investors to opt for it. That said, one must bear a few points in mind before investing:

Maximum limit on tax deduction

As mentioned earlier, investors can claim an income tax deduction of up to Rs. 1,50,000 in a financial year against these FDs. On the other hand, senior citizens can avail of a deduction amounting to a maximum of Rs. 50,000 on the interest earned from tax-saving fixed deposits under Section 80TTB.

Interest is taxable

Interest earned on tax-saving fixed deposits is subject to taxation according to an investor’s tax bracket.

Note that, TDS (tax deducted at source) will be deducted when interest payable or reinvested on RD and FD that exceeds Rs 40,000 (Rs 50,000 for senior citizens) in a financial year. TDS Certificate will be mailed to you, as a depositor, after the end of every quarter during the financial year.

However, the maximum interest not charged to tax during the financial year where form 15 G/H is submitted is as follows.

Up to Rs 2.5 lakh for Indian residents below the age of 60 years
Up to Rs 5 lakh for senior citizens of Indian residents between 60 and 79 years of age at any time during the financial year
And up to Rs 5 lakh for senior citizens above 80 years at any time during the financial year

So you as an investor/depositor need to submit form 15 G/H for every FD you book with the bank for tax exemption.

Difference in rate of interest

Several banks offer slightly higher rates of interest on tax saving FDs to senior citizens compared to the rates offered to non-senior citizens. In fact, most banks offer up to a 0.50% hike in their interest rates to senior citizens. That said, there is no such differential interest rate on 5-year post office time deposits to senior citizens or non-senior citizens.

Premature withdrawals

Premature withdrawals against these FDs are not allowed. Likewise, individuals cannot opt for a loan against these fixed deposits.

Nomination facility

Although these FDs extend a nomination facility, it is not available if the FD is applied for a minor or held on behalf of a minor.

What are the Documents Required for Tax Saving Fixed Deposits?

When planning to open such a fixed deposit account, applicants are required to present a number of documents, namely the following:

Proof of identity

Individuals can submit any of the following documents as their identity proof:

Passport
PAN card
Senior citizen ID card
Voter ID card
Driving license
Aadhaar Card

Proof of residence

Investors can furnish any of these documents as their address proof:

Telephone bill
Electricity bill
Passport
Bank Statement with Cheque
Certificate or ID card issued by Post office

Additionally, individuals must remember the following points while submitting these documents:

Applicants must provide original documents for verification, alongside photocopies of each document.
It is mandatory to produce a permanent address and telephone number.
Avoid overwriting. However, one should countersign in case of any overwriting.

However, since most of the banks have a good digital base, the tax saving fixed deposits can be booked via your net banking platform or through mobile apps. A few banks do offer door-to-door services for senior citizens too.

But keep in mind that these are easy for those who have accounts with the bank, the non-bank customer, that is, if you are a customer of HDFC Bank and try to book a tax-saving FD with India Bank, the procedure could vary. You may have to go down to the bank’s branch with the necessary documents.

Tax Saving FDs – FAQs

Ques. How much tax deduction one can claim with tax-saving FDs?

Ans. Salaried employees may claim a deduction of up to Rs 1.5 lakh under Section 80CCD(1) for their own contributions towards the NPS account

Ques. Who should invest in Tax saving FD?

Ans. Any risk-averse investor who wants a guaranteed return on tax-saving option along with a shorter lock-in period should invest in these fixed deposits.

Ques. Is premature withdrawal allowed in tax-saving FDs?

Ans. No. One cannot break their tax-saving FDs before maturity. As per the Bank Term Deposit Scheme 2006, premature withdrawal of these FDs before the five-year expiry is not allowed.

Ques. Is there any risk in tax-saving FD?

Ans. Tax saving fixed deposits are completely risk-free. The invested amount is completely protected and the returns are also guaranteed.

Ques. What happens when tax-saving FD matures?

Ans. The money is credited into your source account once the fixed deposit term ends.