Tax Saving Fixed Deposit

Tax Saving Fixed Deposit offers investors tax benefits under Section 80C, with a lock-in period of 5 years for assured returns.
OPEN FD
Tax Saving FD
OPEN FD
3 mins
16 July 2024

Tax Saving Fixed Deposit (FD) offer a smart way to grow your savings while enjoying tax benefits. If you're looking for a secure investment option that can help you reduce your tax burden, Tax Saving FDs are worth considering. These FD allow you to claim deductions under Section 80C of the Income Tax Act, 1961, effectively lowering your taxable income. In this article, we delve into the world of Tax Saving FDs, exploring their features, benefits, and how they can be a valuable addition to your financial portfolio.

What is tax saving fixed deposit?

A tax saving FD is a special type of fixed deposit that allows investors to claim tax exemption under Section 80C of the Income Tax Act, 1961. This means you can deduct the amount you invest in the FD from your total taxable income, up to a limit of Rs. 1.5 lakh per financial year.

How does a tax-saver fixed deposit work?

Following are the insights regarding how tax saving FD works:

1. Booking of FD

After selecting a financial institution, individuals decide how much they will deposit and proceed with the account opening process.

2. Selection of maturity period

The lock-in period of tax saving FD is 5 years. Individuals can choose a maturity period longer than that.

3. Claim for tax deduction

After booking the tax-saving FD, individuals become able to claim tax deductions under Section 80C of the Income Tax Act.

4. Maturity value after TDS

The fund deposited in the account grows at a fixed FD rate. The earning on this FD is taxable and financial institutions provide the maturity value after subtracting the tax deducted at source or TDS.

Who should invest in a tax saving fixed deposit (FD)?

Tax Saving FDs are ideal for individuals seeking a safe and reliable investment avenue coupled with tax benefits. Here are two main groups who could benefit:

Risk-averse investors

If you prioritize stability and guaranteed returns over high-risk investments like stocks, a Tax Saving FD offers a secure option. It ensures your principal amount remains safe while providing a fixed interest rate for the entire tenure.

Taxpayers seeking deductions

Individuals looking to reduce their taxable income can utilize Tax Saving FDs to claim deductions under Section 80C of the Income Tax Act. This is particularly beneficial for those in higher tax brackets, as it can significantly lower their tax liability.

Also read: Difference in Section 80C tax break on interest on NSC

Documents required for tax-saving FD

Individuals will have to submit the following documents while opening their tax-saving fixed deposit accounts:

  • Government-approved ID proof: Passport, ration card, driving licence, etc.
  • Proof of age: Aadhaar Card, voter ID card, etc.
  • Residential proof: Telephone bill, passport, bank statement, electricity bill, etc.
    Recently clicked passport-size photographs.

Tax-saving fixed deposit is best for individuals who want to enjoy the dual benefit of growing their funds at a stable interest rate and enjoying a tax deduction. Individuals willing to grow their money securely can now easily apply to open their fixed deposit accounts online. They can reduce their net taxable income by up to Rs.1.5 lakh, depending on how much they invest.

Also read: 7 Tax saving investments to save tax under Section 80c

Fixed deposit variants

Highest Credit Ratings | Trusted with over 1.4 million Deposits | Assured Returns on FD
New Product

Digital FD Only on App/Web

INTEREST RATES UP TO
8.65% p.a.
Invest Online

42 months

INTEREST RATES UP TO
8.65% p.a.
Open FD

FD - Age below 60

INTEREST RATES UP TO
8.50% p.a.
Open FD

Systematic Deposit Plan

INTEREST RATES UP TO
8.65% p.a.
Start SDP

FD - Senior Citizen

INTEREST RATES UP TO
8.65% p.a.
Open FD

FD – Special Tenure

INTEREST RATES UP TO
8.65% p.a.
Open FD

Features of tax saving fixed deposit

Tax-saving FD can help individuals secure the following benefits:

  • Tax deduction:
    As the name itself suggests, individuals can get tax benefits by investing in this fixed-income instrument. According to Section 80C of the Income Tax Act of India, they can reduce up to Rs.1.5 lakh from their gross taxable income. How much tax benefit they will earn depends on the amount they deposit in their account.
  • Flexible payout options:
    Certain financial institutions offer customers two types of payout options for fixed deposit, cumulative, and non-cumulative. In a cumulative payout, individuals receive the entire aggregated value of their deposit at once. On the other hand, they can choose monthly, quarterly, bi-annually, or annual payout of their fixed deposit earning by going with the non-cumulative option.
  • Longer maturity period:
    Tax-saving FD comes with a lock-in period of 5 years. Individuals can also choose to keep their amount deposited for a longer period. By staying invested for a longer time, individuals can maximise their earnings owing to the effect of compounding.
  • Guaranteed income:
    The interest rate of the tax-saving FD remains the same from its booking till the maturity period. Therefore, it becomes possible for individuals to measure what the maturity amount will be even before they invest in the FD. In fact, after booking, financial institutions provide a certificate of the FD that mentions the applicable interest rate, maturity amount, etc. In this regard, individuals can use a Fixed Deposit Calculator to know the maturity value of their deposits.
  • Lump sum deposit:
    With a fixed deposit, individuals can invest an amount of up to Rs.5 crore. Nevertheless, if the objective is only to reduce tax obligations, individuals can book an FD of up to Rs.1.5 lakh since Section 80C does not offer a tax benefit of more than that amount.

Things to consider regarding tax-saving fixed deposits

Here are different aspects that individuals need to check while booking their fixed deposit:

  • Interest rate:
    While booking a fixed deposit, individuals need to check and compare the tax-saving FD rate across several financial institutions. With a higher rate of interest, they can increase their earning potential significantly.
  • Time horizon for investment:
    Individuals may have different financial goals or sets of plans for their investments. For example, they may want to save and grow the fund for their child's education, or the marriage ceremony of their sons and daughters. Since it has a definite lock-in period of 5 years, they need to ensure that the planned events do not fall within this time frame.
  • Security rating:
    Individuals also should ideally check the security ratings of the tax-saving fixed deposits. Different credit agencies like CIBIL and ICRA provide safety ratings to help customers know how risky the fixed deposit account for a certain financial institution can be.

Comparison with other tax-saving investments

Investment Type

Returns

Lock-in Period

Tax on Returns

Tax saving FD

3% to 8%

5 -10years

Yes

Public Provident Fund (PPF)

7.1% (as of 01.01.2024)

15 years

No

National Savings Certificate (NSC)

7.7% (01.01.2024)

5 years

Yes

National Pension System (NPS)

9% to 12%

Till Retirement

Partially Taxable

 

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Frequently asked questions

What is the Digital FD offered by Bajaj Finance?

Bajaj Finance has launched a new FD type called "Bajaj Finance Digital FD" for a period of 42 months. Bajaj Finance is providing one of the highest interest rates of up to 8.65% p.a. for senior citizens and for the customers below the age of 60 they are providing up to 8.40% p.a. The Digital FD can be booked and managed only through the Bajaj Finserv website or app.

Which FD is eligible for 80C?

Only 5-year tax-saving fixed deposits (FDs) qualify for tax deductions under Section 80C of the Income Tax Act. These specific FDs have a mandatory lock-in period.

Which FD is best for tax saving?

The best tax-saving FD depends on your goals. Consider interest rates, your tax bracket, and the bank's reputation. Compare offerings before choosing.

What is the difference between FD and tax saver FD?

Regular FDs offer flexibility – you can choose tenure and withdraw prematurely (with penalties). Tax-saving FDs are exclusively for Section 80C deductions, with a mandatory 5-year lock-in.

Is 5-year FD tax-free for 5 years?

No, a 5-year Fixed Deposit (FD) is not entirely tax-free. The interest earned on the FD is taxable as per the investor's income tax slab. However, the principal amount invested qualifies for a deduction under Section 80C.

Can fixed deposit reduce tax?

Yes, investing in a tax-saving fixed deposit with a tenure of 5 years can reduce your taxable income. The principal amount invested in such an FD qualifies for a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.

Can I break a tax-saving FD?

No, tax-saving FDs come with a mandatory lock-in period of 5 years. You cannot break or withdraw from the FD before the completion of this period, making it a non-liquid investment option.

Does tax-saving FD come under Section 80C?

Yes, tax-saving fixed deposits qualify for a deduction under Section 80C of the Income Tax Act. The principal amount invested in these FDs is eligible for a deduction of up to Rs. 1.5 lakh, reducing your taxable income.

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