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Income Tax-Saving FDs

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  • September 6, 2021
Income Tax-Saving FDs

Fixed Deposits or FDs are financial investments provided by banks offering a fixed rate of interest until the investment matures.

Investors enjoy a stable portfolio with returns that aren’t too dramatic or comparable with equities but are certainly higher than a normal savings account. 

Apart from being a dependable investment tool, you can also use fixed deposits for tax-saving investment purposes. 

As per Section 80C of the Income Tax Act, 1961, premiums on investments can be claimed for tax deductions up to INR 1,50,000. 

However, for an FD to qualify under 80C, the maximum amount permissible is INR 1,50,000. For FDs, the minimum amount stands at INR 100 for most banks. 

These are the top 10 Indian banks providing tax-saving FDs as of May 2021

BankInterest Rates (Regular Public)Interest Rate (Senior Citizens)
State Bank of India5.30%5.80%
ICICI Bank4.30%4.30%
HDFC Bank5.30%5.80%
PNB Bank5.30%5.80%
IDFC First Bank5.70%5.70%
Deutsche Bank5.50%5.50%
Axis Bank5.40%5.90%
DCB Bank6.75%7.25%
Bank of Baroda5.25%5.75%
Lakshmi Vilas Bank5.50%6.00%

Note that banks can revise the above rates, so it’s best to refer to each bank’s website to check the current interest rates.

Taxation details of tax-saving FDs

  • An investor needs to hold the investment for a minimum period of five years to claim tax benefit on the premium paid. 
  • Most FDs mature between 5 to 10 years. 
  • The rate of interest is usually 0.5 per cent higher for a senior citizen. 
  • Taxation rules may differ for senior citizens.

If you fulfil these conditions, the FD becomes an income tax-saving FD

Who are tax-saving FDs for?

  • Individuals who are Indian residents or citizens
  • Hindu Undivided Family or HUF accounts

One can hold a tax-saving FD alone or in joint ownership with another account holder. However, in such cases, only the primary FD holder gets the tax benefit. 

Tax-saving FDs are ideal for individuals who are looking at:

  • Stable returns
  • Regular income 
  • Less risk 
  • Tax saving avenues

Although fixed deposits enjoy a widely accepted stature when it comes to investments, lately they have been compared to National Pension System (NPS) and Equity-Linked Savings Scheme (ELSS) instruments. 

National Pension System is also deductible under Section 80C but offers an INR 50,000 deduction over and above the contribution made.

ELSS too offer INR 1,50,000 deduction under Section 80C. It is a better investment tool considering the money gets invested in equity assets offering higher investment returns than FDs. However, it also has a higher risk and you could end up losing money. 

Conclusions

Tax-saving fixed deposits not only help you save taxes but also provide a safe and stable income over time. You need to hold your investment for a minimum of five years to avail of any tax benefits under Section 80C of the Income Tax Act, 1961. Tax-saving FD interest rates are usually between 5 and 6 per cent. 

FAQs

  • Does NPS offer more returns than FD?

    Yes, NPS offers 9-12 per cent returns per annum. 

  • What are some other tax-saving instruments?

    Public Provident Fund, National Pension System, Equity-Linked Savings Scheme, to name a few.

  • How much tax can I save with a tax-saving FD?

    Up to INR 1,50,000 on the principal investment made.

  • Is it the best mode of tax-saving investment?

    Not for all, but certainly effective. 

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