With the start of the new financial year, you must look for ways to reduce your tax liability. One such option that you can consider is investing in a tax-saving fixed deposit (FD).
By booking a tax-saving FD, you can enjoy tax deductions under the Income Tax Act, 1961. In addition to this benefit, tax-saving FDs are popular since they offer a secure way to invest your money and guaranteed returns at a fixed interest rate.
Understanding Tax-saving Fixed Deposits
A tax-saving fixed deposit works similar to a regular FD, wherein you need to deposit a lump sum amount. The lock-in duration is one of the major distinguishing features of a tax-saving FD. Your investment gets locked for a period of 5 years at a fixed interest rate, which remains unchanged regardless of any interest rate fluctuations in the future.
This means that you are not allowed to make premature withdrawals on your investments. On the contrary, you can liquidate your funds by paying a small penalty in the case of regular fixed deposits.
Tax-saving FDs are an ideal investment option for the following investors:
- Taxpayers seeking to reduce their tax liability
- Investors with low-risk tolerance
- Individuals who plan to diversify their investment portfolio
Features and Benefits of Tax-saving Fixed Deposits
When you book a tax-saving FD, you get to enjoy the following advantages:
Tax Benefits
When you book a tax-saving FD, you could claim deductions of up to ₹1.5 Lakhs on your investment amount according to Section 80C of the Income Tax Act. This is one of the significant attributes of this investment option. However, the TDS on the fixed deposit interest earned is applicable based on the individual’s tax bracket.
If you submit Forms 15H or 15G, the bank will not deduct TDS on the interest you earn on your investment.
Flexibility in Investment Amounts
Investing in this fixed deposit is affordable and convenient as you enjoy flexibility in choosing the initial investment amount. However, The minimum investment amount varies from one issuer to another.
It is essential to note that the maximum amount that you can invest in these fixed deposits is ₹1.5 Lakhs for tax deductions.
Higher Rates for Senior Citizens
Tax-saving FDs are also a wise investment choice for senior citizens. This is because senior citizens enjoy a more favourable interest rate on such deposits, similar to regular FDs.
Many issuers offer an additional 0.50% p.a. interest rate to senior citizens compared to the rates offered to regular citizens.
Nomination Facility
You also utilise the facility of nominating your family members for your tax-saving FD investments. Once you add your members as nominees, they can receive the investment amount without any legal issues in the case of an unfortunate event.
Branch Transfer Facility
You also get the facility of transferring your tax-saving FD from one branch of your issuer to another branch.
This is a convenient process as you just need to submit a written application to the respective branch that holds your fixed deposit. This facility can be helpful if you decide to shift to a different city or state.
Tax-saving Fixed Deposits Rates of Various Banks
Refer to the following table to check the latest interest rates that leading financial institutions offer on tax-saving fixed deposits:
| Financial Institution | Interest Rates for General Citizens (p.a.) | Interest Rates for Senior Citizens (p.a.) |
| AU Small Finance Bank | 7.25% | 7.75% |
| Ujjivan Small Finance Bank | 7.20% | 7.70% |
| YES Bank | 7.25% | 8.00% |
| IndusInd Bank | 7.25% | 7.75% |
| Kotak Mahindra Bank | 7.00% | 7.60% |
Disclaimer: The aforementioned interest rates are subject to change at the discretion of the issuer.
With this information in hand, you can plan your investment and save money on taxes. Submit the required documents and book an FD on time to maximise your earnings. Compare various issuers before you zero in on an FD issuer.
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