Fixed deposits are one of the most preferable investment options for Indians. In fact, according to the Reserve Bank of India data, India currently holds 24.23 million FD accounts, valued at over ₹103 trillion. Many features like fixed returns, DICGC-backed insurance, and low risk contribute to their popularity.
As an investor, there are multiple types of FDs that you can choose from. While many investors tend to look for fixed deposits with the highest interest rate, you can also reduce your tax liability by investing in tax-saving FDs. Tax-saving FDs offer the dual benefit of stable returns and tax efficiency. You get the best of both worlds, i.e., optimised returns and tax benefits.
Here is a comprehensive guide that explains how tax-saving fixed deposits can become a wise move for savvy investors.
What is a tax-saving FD? An overview
Tax saving fixed deposits are a type of term deposit offered by banks that qualify for tax benefits under section 80C of the Income Tax Act, 1961. As an investor, you can claim a deduction of up to ₹1.5 lakh per annum by investing in these FDs.
Note that these deposits come with a lock-in period of five years, during which you cannot withdraw the invested amount.
Taxation of interest you earn through tax-saving FDs
The fixed deposit tax-saving feature helps you reduce your tax liability but remember that only the principal amount qualifies for tax deductions. The interest you earn from the deposit attracts tax deducted at source (TDS) taxable as per your tax bracket.
TDS applies if the interest earned in a financial year exceeds ₹40,000 (for individuals below 60 years) and ₹50,000 (for senior citizens). On submission of the PAN Card, the bank deducts TDS at 10%. If you do not provide your PAN Card to the bank, the TDS rate is 20%. In case you do not fall under the taxable income bracket, simply submit Form 15G (or Form 15H for senior citizens) to the bank to avoid this deduction.
Key features of tax-saving fixed deposit schemes
Investors must know the following key features of tax-saving fixed deposit schemes before investing in them:
- The minimum deposit amount can vary from one bank to another, but the deduction under section 80C is capped at ₹1.5 lakh.
- Senior citizens usually get better tax-saving FD interest rates than regular customers. The additional FD interest rate usually ranges between 0.25% to 0.5%.
- Tax-saving FDs may offer a nomination facility which allows investors to nominate a beneficiary for the FD amount in the event of the depositor’s demise.
- Tax-saving FDs are available to Indian individuals and Hindu undivided family (HUF) members. Even a minor can open an account jointly with an adult. However, banks may not offer the nomination facility to minors who own these FD accounts.
- Banks generally restrict the options for early withdrawal and loan against FD facility for tax-saving FDs.
- Interest in a tax-saving FD compounds quarterly and is credited to accounts at the end of each quarter.
How can you invest in a tax-saving FD?
You can book tax-saving deposits through mobile banking, net banking, or by visiting a bank branch. However, the simplest way is offered by IndusInd Bank through its INDIE app. This digital banking app offers a 100% digital process to book your FD. All you have to do is:
- Download INDIE app
- Login with your mobile number
- Simply provide your Aadhaar card and PAN card details
- Enter the amount to book an FD, and that’s it
Book a fixed deposit with one of the highest interest rates for Senior citizens of up to8.25% p.a., with INDIE today and boost your savings!
Key takeaways
Tax-saving fixed deposits offer safety, predictable returns, and tax efficiency, which make them a valuable addition to your investment portfolio. With features like additional benefits for senior citizens, simplicity of online transactions, and options for nomination, these investments cater to different types of investors.
At the same time, it is crucial to understand their specifics, such as the 5-year lock-in period and how taxes apply to the interest earned. Use this guide to learn critical details of tax-saving fixed deposits and make your decisions more informed and strategic.
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