Tax-Saving Fixed Deposit

The capital in a fixed deposit is fully protected but the deposit is not inflation protected

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A bank fixed deposit is also known as term deposit, which earns better interest compared to the interest that the account balance earns in a savings bank account. This is a type of instrument in which a certain sum of money is placed with the bank for a specified time period at a fixed interest rate. Such deposits are preferred by risk-averse investors, who find the guaranteed fixed returns extremely reassuring to invest in. The interest rates varies from bank to bank. Tax-saving fixed deposits have a fixed tenure of 5 years.

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Capital & Inflation Protection
The capital in a fixed deposit is fully protected up to lakh by the Deposit Insurance and Credit Guarantee Scheme of India. The deposit is not inflation protected, which means whenever inflation is above the deposit interest rate; the deposit earns no real returns. However, when the interest rate is higher than inflation rate, it does manage a positive real rate of return.

The interest rate is fixed and guaranteed for the duration of the deposit at the commencement of the deposit.

Tax-saving fixed deposit has a lock-in period of 5 years and does not allow pre-mature withdrawal or loan against deposit.

Tax Implications
A tax-saving deposit with a maturity period of 5 years in a scheduled bank is eligible for tax deduction under Section 80C. However, the interest earned is considered as income from other sources when computing income tax. Effective from June 1, 2015, tax is deducted at the source on the interest income above 10,000 at a rate of 10 per cent.

Where to Open a Tax-Saving Fixed Deposit
You can open a deposit at any nationalised, private sector or foreign bank.

How to Open a Tax-Saving Fixed Deposit

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

Exit Option
Early closure of a tax-saving deposit 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 deposit with the natural guardian operating it.
Minimum Investment: Rs 1,000
Interest: Interest rate on a tax-saving bank fixed deposits keep on revising and varies from bank to bank. However, once you invest in a fixed deposit, the interest rate for that deposit would remain constant. Currently, the rate of interest on a 5 year tax saving deposit is around 7 per cent.
Tenure: 5 years
Account holding categories

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

Nomination Facility: Available

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