Tax Saving Alternatives

Investing in a tax-saving fixed deposit

Tax-saving FD helps you invest to save tax under section 80C of the Income Tax Act. Here is a complete guide to investing in a tax-saving fixed deposit

Tax saving FD: What is it, how to open & tax implications

A bank fixed deposit is also known as a term deposit and earns better interest than a savings bank account. A sum of money is placed with the bank at a fixed interest rate for a specified period. Risk-averse investors prefer these deposits and find the guaranteed fixed returns extremely reassuring. While fixed deposit interest rates may vary from bank to bank, tax-saving fixed deposits have a fixed tenure of five years.

Capital & inflation protection
The capital in a fixed deposit scheme is fully protected up to Rs 5 lakh by India's Deposit Insurance and Credit Guarantee Scheme. However, the deposit is not inflation protected, which means that whenever inflation is above the fixed deposit interest rates in banks, the tax-saving fixed deposit earns no real returns. But when the interest rate is higher than the inflation rate, it does manage a positive real rate of return.

The interest rate in a tax-saving FD is fixed and guaranteed for the duration of the deposit at the commencement.

Tax-saving fixed deposits have a lock-in period of five years. Premature withdrawal or loan against deposit is not allowed.

Tax implications
A tax-saving FD with a maturity period of five years in a scheduled bank is eligible for tax deduction under Section 80C. However, the interest earned is considered income from other sources when computing income tax. Effective from April 1, 2019, tax is deducted at source on the interest income above Rs 40,000 (Rs 50,000 for senior citizens) at a rate of 10 per cent.

Where to open a tax-saving fixed deposit
You can open a tax-saving FD at any nationalised, private sector or foreign bank.

How to open a tax-saving fixed deposit

  • To start a tax-saving fixed deposit, you can issue a cheque to the bank through your existing savings bank account. A deposit receipt or certificate is issued with deposit details.
  • Your existing bank account counts as being KYC compliant if you open the tax-saving FD at the same bank.
  • You may also use the internet or mobile banking to open a tax-saving deposit with your existing bank.

Exit option
Early closure of a tax-saving FD is not permitted.

Features at a glance
You need to be a Resident Indian.
Entry age: You need to be over 18 years old; minors can open a tax-saving FD with the natural guardian operating it.
Minimum investment: Rs 1,000
Interest: Interest rates on tax-saving fixed deposits are regularly revised and vary from bank to bank. However, once you invest in a fixed deposit, the rate for that deposit would remain constant. Currently, the interest rate on a five-year tax-saving fixed deposit given by SBI is 5.4 per cent.
Tenure: Five years

Account holding categories

  • Individual
  • Joint
  • Hindu Undivided Families (HUF)
  • Minor through the guardian

Nomination facility: Available

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