Tax Saver FDs- Meaning and Key Features

Fixed Deposits (FDs) are a reliable investment choice for those wary of risks and offer a brilliant avenue to save on taxes. By investing in tax-saver FDs, individuals can enjoy deductions under Section 80C of the Income Tax Act, thus reducing their taxable income and, subsequently, their tax liability. Essentially, the less taxable income you have, the lower your tax outgo.

The appeal of FDs lies in their simplicity and guaranteed returns. With an initial investment that can be as modest as Rs.1000, anyone can open an FD account, choosing a tenure that begins in just 7 days. The exact interest earnings, starting from around 3% annually, hinge on the chosen financial institution. It’s worth noting that the tax-saving FDs come with a lock-in period of 5 years, ensuring the dual benefit of tax savings and interest accumulation.

This article will delve deeper into the world of tax-saving fixed deposits. You’ll get insights on their meaning, benefits, features, the documents needed to open one, prevailing interest rates, and more. Dive in to become well-versed with this prudent financial instrument.

What are Tax Saver FDs?

Tax-saver FDs are a type of fixed deposit scheme that help you save taxes. These fixed deposit schemes have a tenure of five years and allow you to claim a tax deduction on the amount you invested under section 80C. You can claim a deduction of up to Rs.1.5 lakhs under section 80C of the Income Tax Act, 1961, when you invest in tax saving FD accounts.

While the tenure is fixed for five years, there is no cap on the amount you wish to invest. The tax deduction, however, is only up to Rs.1.5 lakhs. It should be noted that this tax-benefit is only applicable to the invested amount and not the interest income, which remains taxable. 

Further, the tax-saving FD interest rates are usually in the range of 5.5 – 7.75%.

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

Features of Tax Saving FDs

The salient features of tax-saving FDs are as follows –

• The money that you deposit remains invested for five years with no option for premature withdrawal.
• The rate of interest, once fixed, does not change during the deposit tenure
• If you are a senior citizen, you can enjoy higher interest rates.
• Tax Saving FDs do not have an automatic renewal option.
• TDS (10%) would be applicable if the aggregate interest income exceeds Rs.40,000. However, if your taxable income falls below Rs.2.5 lakhs, you can claim an exemption from TDS by submitting Form 15G/15H
• For senior citizens, interest income up to Rs.50,000 would be tax-free under section 80TTB.
• You cannot avail of a loan against the mortgage of these fixed deposits
• You can open the fixed deposit account jointly. However, the tax benefit would be available only to the first holder.
• You can open a tax-saving FD account in the majority of public and private sector banks, including Post Offices.

Benefits of Tax-Saver Fixed Deposits

The 5 year tax saving fixed deposit schemes have multiple benefits over other schemes and investments. These benefits are:

• Tax benefit
  The primary benefit of a tax-saver FD scheme is its tax advantage. You can claim a deduction up to Rs.1.5 lakhs on your deposit amount to reduce your taxable income. If you fall in the 30% tax bracket, you save Rs.45,000 in taxes.
• Guaranteed returns
  Fixed deposit schemes offer guaranteed returns on your investment. Once fixed, the tax-saving FD interest rates do not change, allowing you to enjoy safe returns every year. Moreover, the returns compound every time they are declared, giving you higher returns in subsequent years, so you amass a decent corpus.
• Safe investment avenues
  Tax-saving fixed deposits are not linked to market-securities, so they offer safety against volatility. Even if the market falls or suffers a crash, tax saving fixed deposit rates remain secured and fixed.
  Moreover, with bank deposits, you also enjoy an insurance cover up to Rs.5 lakhs. This means that deposits up to Rs.5 lakhs are secured even if the bank ceases operations.
• Additional benefits for senior citizens
  Senior citizens get to enjoy additional benefits with 5-year tax-saving fixed deposit schemes. For starters, tax-saving fixed deposit interest rates are higher for senior citizens. Secondly, they enjoy tax-free returns up to Rs.50,000, giving them dual tax benefits during investment and redemption.
• Affordable and simple investments
  Tax-saver FDs are an affordable option that can start with an investment as low as Rs.1000. However, the minimum investment amount is different in each bank. Moreover, with online investment facility offered by most institutions, you can open an account quickly and conveniently.
• Helps plan for your financial goals
  With the guaranteed corpus that the saving fixed deposit promises, you can plan ahead for your mid to long-term financial goals.

Documents Required for Tax Saving FD Account

Individuals, senior citizens and Hindu Undivided Families (HUFs) can open a tax-saving FD account. You must submit a set of documents for the financial institution to authenticate and verify your identity and carry out the KYC compliance norms.

The documents required include the following –

• Valid identity proof
  • Aadhaar Card
  • Driving Licence
  • Passport
  • PAN Card
  • Voter ID Card
  • Any other ID card containing your photo and issued by a recognised institution
• Valid address proof
  • Aadhaar Card
  • Driving License
  • Passport
  • Voter ID Card
  • Property Deed
  • Rent agreement
  • Latest utility bills
  • Bank statement

You should self-attest the copies of your identity and address proof. The financial institution may ask to see the original documents too.

Crucial Points to Know While Submitting the Documents

• Ensure the original documents for verification, and a copy of each document is given to them.
• You can submit any other identity or address proof based on the bank’s rules and regulations.
• Specifically, BLACK INK should only be used to fill in the information using CAPITAL LETTERS.
• In case of any overwriting, make sure to put a counter signature.
• Avail the nomination facility.
• Telephone number and address proof are mandatory during this process.

Things to Consider While Investing in Tax-Saving Fixed Deposits

While you might find the tax-saving FD to be the right investment avenue for your savings, here are a few things that you should know when you invest –

• Minors can open a tax-saving FD account jointly with an adult. The adult would be the primary account holder eligible to claim tax deductions.
• The minimum amount required for the deposit varies across banks and post offices. Some banks might even allow a minimum investment of Rs.1000. Find out the minimum investment required when you decide to invest in these FDs
• There is no maximum limit on investments. However, the tax benefit is available only on a maximum investment of Rs.1.5 lakhs. If you invest a higher amount, the excess would be considered a part of your taxable income and will be taxed at your tax-slab rate.
• You cannot make partial withdrawals from your deposit during the lock-in period of five years.
• You should nominate a family member to receive the maturity amount in the case of your sudden demise.
• If your interest income is exceeding Rs.40,000, it is eligible for taxation. However, if your annual taxable income is below Rs.2.5 lakhs, submit Form 15G or 15H to the bank or post office to claim TDS exemption.

Best Tax Saver FD Schemes Offered by Top Indian Banks (2023)

Comparison of FDs with Other Tax-Saving Investment Options

Let’s take a look at the comparison between FDs and other tax-saving investment options:

FD vs Equity Linked Saving Scheme (ELSS)

• Returns: ELSS funds can provide higher returns than FDs. However, the returns on FDs are fixed, whereas the returns on ELSS funds are not fixed and can be affected by market conditions.
• Lock-in period: The FD scheme has a lock-in period of 5 years, whereas the investment in ELSS funds has a lock-in period of 3 years.
• Taxability of returns: The interest earned on FDs is included in the investor’s total income and taxed accordingly. The capital gain arising after the maturity of ELSS funds is long-term capital gain. Long-term capital gains above ₹1,00,000 are taxable.

FD vs Public Provident Fund (PPF)

• Returns: PPF can provide a higher return than an FD. The interest rate on FDs and PPFs is fixed and not subject to market volatility.
• Lock-in period: The FD scheme has a lock-in period of 5 years, whereas the lock-in period of PPF is 15 years.
• Taxability of returns: The interest earned each year on FDs is included in the investor’s total income for that financial year and taxed accordingly. The interest earned on PPF is not taxable.

FD vs National Savings Certificate (NSC)

• Returns: NSC can provide a higher return than an FD. However, the rate of interest on FDs and NSC is fixed.
• Lock-in period: Both the FD scheme and the NSC have a maturity period of 5 years.
• Taxability of returns: The interest earned each year on FDs is included in the investor’s total income for that financial year and taxed accordingly. The interest per year earned on the NSC is re-invested, and you can claim the deduction of the interest amount under Section 80C if the limit of ₹1,50,000 is not thoroughly exhausted. You can claim the interest deduction at the end of years 1,2,3 and 4. The interest earned for the last or fifth year is taxable as it cannot be re-invested.

FD vs Sukanya Samriddhi Yojana (SSY)

• Returns: The interest rate on FDs is updated continuously. The rate of interest on the amount invested in SSY is updated by the Central Government. It can be similar to or slightly lower or higher than the rates of FDs.
• Lock-in period: Tax-saver FDs have a lock-in period of 5 years. The amount invested in SSY can be withdrawn after the girl has attained the age of 21 years or her marriage, whichever is earlier. Partial withdrawal is also allowed for specific purposes after the girl reaches the age of 18 years.
• Taxability of returns: The interest earned each year on FDs is included in the investor’s total income for that financial year and taxed accordingly. The interest and the maturity amount accumulated under the Sukanya Samriddhi Yojana are exempt from tax.

How To Avoid TDS Of Fixed Deposits?

There are a few ways for you to avoid TDS on your fixed deposits. Make sure to stay ahead of the curve with the latest financial practises to ensure that you do not bear the burden of paying a lot more TDS than you should:

• Submit Form 15G/15H: Use Form 15G for individuals below 60 or Form 15H for senior citizens to declare income below taxable limits, preventing TDS deduction.
• Spread Your Investments: Distribute your FDs among different banks to ensure interest income from a single bank doesn’t exceed the TDS threshold.
• FD in Non-working Family Member’s Name: Utilize the tax-free limit of a non-working spouse or family member by putting the FD in their name.
• Update PAN with FD: Ensure your PAN is linked with the FD to avoid a higher TDS rate.
• Declare Interest in Income Tax Return: Always disclose your FD interest income when filing tax returns and pay any tax due.

Drawbacks of the Tax-Saver FD Scheme

• The lock-in period of 5 years is compulsory for claiming the tax deduction in the year of investment.
• Pre-mature withdrawal of the tax-saver FD is not allowed. If it is withdrawn before maturity, the tax deduction is reversed. The banks also charge penalties on pre-mature withdrawal of the FD.
• The FDs offer a fixed interest income and do not change or fluctuate with the market’s movement. Hence, you cannot earn exceptionally high returns in favourable market conditions.
• The interest income earned on the FDs is not exempted from tax.
• Only individuals and HUFs can benefit from deductions under Section 80C for the lump sum deposit in the tax-saver FD scheme. It does not apply to other entities.

Conclusion

If you are looking for a fixed-income investment avenue offering tax benefits, you can go for a five-year fixed deposit scheme. You can avail the dual benefit of creating a secured corpus while enjoying tax relief. Compare the deposits by different banks to get the highest interest rate on your investments. Plan your mid to long-term financial goals with the promise of guaranteed returns.

FAQs Tax saver FDs