Tax-saving fixed deposits (FDs) are an excellent investment option for individuals looking to earn secure returns while saving on taxes. Offered by banks and Non-Banking Financial Corporations (NBFCs), these deposits come with a fixed tenure and interest rate. Unlike regular FDs, tax-saving FDs provide tax benefits under Section 80C of the Income Tax Act.
In this comprehensive guide, we’ll cover the meaning, features, benefits, working, and tax implications of tax-saving fixed deposits, ensuring you make an informed decision. For more details, you can also explore this detailed guide on tax-saving FDs by Tata AIA.
Also Read: Home Loan Prepayment Strategies: Save Lakhs and Become Debt-Free Faster
What are Tax-Saving Fixed Deposits?
Tax-saving FDs are fixed deposit schemes designed to help you save on taxes. Under Section 80C of the Income Tax Act, the amount invested in a tax-saving FD is eligible for a deduction up to ₹1,50,000 in a financial year. However, these deposits come with a mandatory lock-in period of five years.
Key points:
- Maximum Investment: ₹1,50,000 per financial year.
- Lock-in Period: 5 years.
- Tax Deduction: Available only to the first holder in case of joint accounts.
- Interest Taxation: Interest earned is taxable.
How Does a Tax-Saving FD Work?
Here’s an example to illustrate:
Ms. Madhu invested ₹50,000 in a tax-saving FD in 2021 for a 5-year tenure. She opened a joint FD account with her husband as the second holder. Being the primary account holder, Madhu claimed a tax deduction of ₹50,000 under Section 80C for FY 2021-22. The invested amount is locked-in until 2026, and the interest earned during this period is taxable.
Features of Tax-Saving Fixed Deposits
- Tax Benefits: Deduction up to ₹1,50,000 under Section 80C.
- Lock-In Period: 5 years. Premature withdrawals are not allowed.
- Fixed Interest Rates: Remains constant throughout the tenure.
- No Auto-Renewal: On maturity, the amount is transferred to the linked savings account.
- Interest Taxable: Tax is applicable on the interest earned.
- Multiple Payout Options: Interest can be credited monthly, quarterly, or annually.
- No Loan Facility: Loans against tax-saving FDs are not permitted.
- Single and Joint Accounts: Available as both single and joint accounts, but only the primary holder can claim tax benefits.
- Varied Rates: Interest rates vary across banks and account types (e.g., senior citizens often receive higher rates).
Benefits of Tax-Saving Fixed Deposits
- Low-Risk Investment: Guaranteed returns with no market fluctuations.
- Tax Deduction: Save up to ₹1,50,000 annually on taxable income.
- Flexible Investment Amounts: Invest amounts ranging from ₹100 to ₹1,50,000.
- Mid-Term Savings: Ideal for investors with a 5-year financial goal.
Who Can Invest in Tax-Saving Fixed Deposits?
Eligible individuals include:
- Indian citizens
- Hindu Undivided Families (HUFs)
- Minors (with a joint account alongside a parent/guardian)
Documents Required for Tax-Saving FDs
- PAN Card
- Identity Proof (e.g., Aadhaar, Passport, Voter ID)
- Address Proof (e.g., Aadhaar, Utility Bill, Passport)
- Proof of Age (for senior citizens)
- Passport-size photographs
If you hold an existing KYC-compliant savings account, additional documentation may not be required.
Tax Implications of Tax-Saving Fixed Deposits
- Tax on Interest: Interest earned is taxable. TDS is deducted at 10% if the interest exceeds ₹10,000 annually.
- PAN Requirement: TDS is charged at 20% if PAN details are not provided.
- Declaration Forms: Submit Form 15G (non-senior citizens) or Form 15H (senior citizens) to avoid TDS if your tax liability is zero.
Final Thoughts
Tax-saving fixed deposits are a secure and efficient way to save on taxes while earning assured returns. They are especially beneficial for risk-averse investors and individuals with mid-term financial goals. However, it is essential to plan your finances to maximize the benefits.
For enhanced financial security, consider complementing your investments with a life insurance policy to safeguard your family’s future. Explore options that align with your financial objectives and provide additional peace of mind.
