Things to Know about a Tax-Saving FD

A tax-saving fixed deposit is a type of FD account that provides the account holder with a tax deduction under the provision of the Income Tax Act. To elaborate, individuals who park their money into a tax-saving FD account can claim a tax deduction of up to Rs. 1.5 lakh in a year. However, individuals must note that the interest they earn on their tax-saving FD account is still taxable. Additionally, such an FD facility comes with a fixed lock-in period. 

Such unique features make it mandatory for individuals to find out more about tax saving FD to make the most of the savings instrument. 

Features of Tax-Saving Fixed Deposits

A tax-saving FD serves as an effective financial tool that not only helps mobilize savings but also helps save money on taxes. Note that fixed deposit is a bank-based investment tool and hence is monitored by the Reserve Bank of India. This also ensures that the invested money is safe and has a low-risk quotient. Additionally, FD account holders can easily redeem the money upon maturity.

That said, let us check out the key features of the tax-saving FD that every intending FD holder should know –

Interest: A tax saving fixed deposit offers a higher interest when compared to regular savings accounts. The rate of interest remains the same throughout the FD tenure. However, the interest rate for NRIs, HUFs, and Indian citizens may vary among FD providers. Additionally, the interest rate on tax saving FD for senior citizens is higher than that offered to regular investors. Note that the FD interest is paid either monthly or quarterly, and the same can be reinvested.

Deposit: Individuals can park only a single lump sum deposit into the tax-saving FD account. This frees them from the obligation to make regular investments.

Tenure: The tax saving FD comes with a lock-in period of 5 years, which is also the minimum tenure for the fixed deposit account. However, the account holder can extend the FD tenure beyond 5 years.

Deposit amount: The tax-saving FD offers flexibility to park money into the account as per their capacity and convenience. In other words, based on one’s financial standing and goals, one can deposit any amount of money into the FD account. However, the minimum deposit limit starts from Rs. 100, and the maximum ends at Rs. 1.5 lakhs in a given year.

Tax benefit: Under Section 80 C taxpayers can claim a maximum of Rs. 1.5 lakhs yearly. However, tax deducted at source: The interest accumulated on tax saving FD is liable for TDS at a fixed rate.

Withdrawals: Some tax-saving FDs may not allow premature withdrawals during the lock-in period. However, under certain situations, individuals may be allowed to withdraw funds they could be asked to pay a penalty to access their deposits.

Points to Remember Before Parking Money into a Tax Saving FD

Keep these pointers in mind before depositing money into tax-saving FD:

Tax saving fixed deposit eligibility: Resident Individuals who are 18 years and above and HUFs can start a tax saving deposit account. Additionally, minors can also co-hold a tax-saving FD account with an adult.

Minimum Deposit: The tax-saving FD deposit account can be opened with an amount as minimum as Rs. 100. However, the minimum deposit amount may vary across FD providers and institutions.

Lock-in Period: These tax-saving FDs come with a lock-in period of 5 years. During this period, individuals cannot withdraw their funds. 

Withdrawal and Loan: These tax-saving FDs do not allow any premature withdrawal nor do they extend loans against deposits. However, in some cases, they may be able to access funds but have to pay some penalty.

Tax deducted at source: The interest earned on the tax-saving fixed deposit is subject to tax deducted at source or TDS. The TDS rate is based on the depositor’s current tax slab. However, one can avoid the TDS burden by simply submitting Form 15G or Form 15H in case of senior citizens to the FD provider. Note that TDS is applicable only if the interest accrued exceeds Rs. 40000 in a given year that too without any change in tax treatment of interest income. Similarly, citizens are entitled to claim a TDS deduction of a maximum of Rs. 50000 on the interest earned from FD deposits under ITA’s Section 80TTB. 

Nomination: The tax-saving FD accounts also offer a nomination facility, under which accountholders can name a beneficiary or nominee. However, this facility is unavailable if the account is held by a minor.

Individuals can park money into tax-saving fixed deposits via public or private banks for rural and cooperative banks. However, it is recommended to check and compare the features of tax-saving FD and the terms and conditions laid by the provider to make the most of the investment tool.

Post Office Time Deposit

Putting money into a post office time deposit for a tenure of 5 years is also eligible for deduction under the Income Tax Act’s Section 80C. Such deposits can be transferred from one post office to the other and managed. Individuals can hold a post office time deposit either single handedly or in joint mode. Note that if the account is held jointly then the tax benefit will be made available only to the primary account holder. It should be noted that the post office does not provide senior citizens with higher interest rates on their tax-saving FD.

Tax-Saving FD versus Other Investments

Individuals can also park their money into other tax savings options to generate wealth and build a corpus. For example, they can park money into investment options such as Public Provident Funds, mutual funds, and National Savings Certificate. 

However, fixed deposits are still considered to be one of the safest investment tools as they extend both capital protection and growth without being exposed to market fluctuations. Then again, the returns earned through FD are subject to tax.

This gives schemes, savings and income plans like ELSS an upper hand. It extends dual benefits – i.e.,  it offers higher and tax-free returns to investors. Additionally, it comes with a lock-in period of only 3 years, unlike tax saving FD’s 5-year lock-in period.

Regardless of which investment option one picks, it is crucial to know one’s risk appetite and goals before selection. Also, when it comes to FD options, it is key to check the features and terms offered by the provider. So make sure to check all the requisites before investing in them.

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