What are Tax-Saving Fixed Deposits? Which are the Top 10 Tax-Saving FDs in India?

Introduction

A tax-saving fixed deposit account comes in various forms to enable individuals to save funds. You can choose the tenure of the fixed deposit based on your convenience, generally, banks offer a 5-year fixed deposit scheme for tax savings. Investing in tax-saving FD allows you to avail of tax benefits under section 80C of the income tax act. Investors can get a tax exemption of up to 1.5 lakhs. In this article, we are going to learn about tax saving FD, what tax saver fixed deposit is, fixed deposit for tax exemption, and fixed deposit tax benefits.  

Example: Mr X is looking to invest in tax saving fixed deposit. He books an FD with the following features: 

• Deposit period: 5 years
• Type of Account: Special Term Deposit
• Amount invested Rs 1 lakh
• Mr X can claim tax relief under Section 80 C for Rs 1 lakh. However, the interest earned on the fixed deposit will be taxable at his income tax slab rate.  

What are Tax-Saving Fixed Deposits?

A tax-saving FD is a financial instrument provided by banks and National bank financial corporations. An individual investing in tax-saving FD can avail of tax benefits up to Rs. 1,50,000 under section 80C. The lock-in period is 5 years and the interest earned on tax-saving FD is taxable. The interest rate ranges from 5.5% to 7.75% although interest rates differ from bank to bank. One can open a tax-saving fixed deposit account by depositing as less as Rs. 1000  and a maximum of up to 1.5 lakhs. 

Key takeaways: 

• Tax-saving FD is one of the safest instruments to invest. 
• It has a minimum lock-in period of 5 years. 
• The interest rate is fixed. 
• The tenure of tax-saving FD can range from 5 to 10 years. 
• Tax-saving fixed deposits have been used over decades by people for a safe investment. 

FD vs. ELSS

FDs are a safe investment option. ELSS is also a safe investment option, but they have lock-in periods of 3 years and can be liquidated anytime during the lock-in period. FDs offer higher returns than ELSS; however, this return comes at the cost of liquidity. In other words, you can't withdraw your money from an FD before maturity unless you pay an early withdrawal penalty.

ELSS help investors save taxes by investing in them through their respective tax-saving mutual fund schemes. Stocks in these mutual funds are considered growth stocks (as opposed to defensive ones). They offer long-term capital appreciation and tax savings on their investments due to the deduction limit permitted by Section 80C of 1961 (IT 1961).

What Does Loan Against FD Mean?

Here's a sneak peek into how loan against FD works:

You can use your tax-saving FD as collateral to borrow money for any of the following purposes:

• To buy a house or car
• To expand your business
• To pay for education expenses
• To invest in start-up ventures To fund your retirement, You can also use the loan to pay off your existing debt or to meet any other financial expenses. 

Which are the top ten tax-saving FDs in India?

The table below shows the fixed deposit interest rates applicable for amount less than Rs 2 crore and a period greater than 1 year. 

Who can Open a Tax-Saving Fixed Deposit?

• Resident of India
• An individual who is 18 years above
• A minor can also invest in a tax-saving FD account jointly with an adult. 
• Hindu undivided family (HUF)

What are the documents necessary to open a tax-saving FD account?

To open a tax-saving FD account one needs to submit both identify proof and address proof

Identity proof 

• PAN Card
• Aadhar Card
• Driving license
• Passport
• Voter ID card

Address proof

• Bank account passbook
• Passport
• Aadhar card
• Electric bill
• Bank statement 
• Driving license 

What are the different types of Tax-saving Fixed Deposits? 

There are different categories of fixed deposits based on their benefits, types, and purpose. So, the list of types of Fixed deposits is given below: 

1. Regular fixed deposit: Regular fixed deposit is for individuals who are aged less than 60 years. Any individual having an Indian residence can open a fixed deposit account and the interest rate for a regular fixed deposit is comparatively lower than the one offered for senior citizens. 
2. Senior Citizen fixed deposit: An individual aged above 60 years of age can open a fixed deposit account dedicated to senior citizens. Senior citizens are offered higher interest rates than usual and they have flexible tenures. 
3. Tax-saving fixed deposit: Individuals can save tax up to 1.5 lakhs by investing their money in tax-saving fixed deposits under section 80C. The minimum lock-in period is 5 years for this account. 
4. Cumulative fixed deposit: A cumulative fixed deposit allows you to grow your savings substantially as the interest on this account is compounded every quarter or year and the total amount is paid at the time of maturity. 
5. Non-cumulative fixed deposit: Non-cumulative fixed deposits are best suited for retirees who are looking for regular income as the interest earned on this fixed deposit can be paid out to the investor monthly, quarterly, or annually. 

Taxation on such FDs

Fixed Deposits (FDs) are an investment option that can be used to save on taxes. However, this is only possible if the investment amount is high enough and kept for at least five years.

The taxation of FDs depends on multiple factors such as:

• The period for which the deposit is being made;
• The interest rate for that particular fixed deposit; and
• The tax bracket of the investor.

FDs are tax-free if the following conditions are met:

• You have invested at least Rs 1 crore in one financial year.
• The deposit is held for five years.
• It is not a term deposit.

How to Avoid TDS on FDs?

As you are about to invest in an FD, you must know how to avoid TDS on FDs.

TDS means tax deduction at source. When you invest in an FD without proper documentation, the bank deducts TDS from your investment and pays it to the government as income tax on behalf of the payer. TDS can be avoided by investing through an electronic KYC–enabled bank account or via Form-16 (for salaried individuals). The interest earned from such investments will not attract any TDS liability since no PAN is required for this purpose.

As far as claiming tax deductions on fixed deposits are concerned, two things need consideration:

The amount invested by an individual should exceed Rs 1 lakh per financial year; and

The interest earned should be less than Rs 10 lakh during a financial year

If both conditions are satisfied, you can claim a deduction of up to Rs 2.5 lakh for fixed deposits (FD) investments. The deduction can be claimed on Form 26AS and filed with your income tax return.

Benefits of Tax-Saving Fixed Deposits

• Safety: When it comes to savings, the population over the decades has always turned to fixed deposits because the RBI (Reserve bank of India) closely monitors bank-based investment products which makes it a safe and low risk for investors.
• High-interest rates: They offer higher interest rates than a savings account and the minimum tenure of a tax saver fixed deposit is five years. 
• Flexibility: A fixed deposit allows you to make a one-time lump sum investment and the amount deposit is flexible.
• Tax benefits: Under section 80C, investors can avail of income tax deductions of up to Rs. 1,50,000. 
• Liquidity: The tax-saving Fix deposit account has a lock-in period of 5 years. So, one can withdraw the amount at maturity. 
• Fixed returns: Investing in tax-saving fixed deposits gives you a guaranteed return at the end of the deposit tenure. 

Limitations of Tax saving Fixed Deposits

• Lock-in period: Fixed deposit accounts have a specific lock-in period and if an investor wants to withdraw the amount before the maturity, he has to pay a penalty on the interest rate, which is a loss. 
• Interests are taxed: The interest gain on the tax saving FD is fully taxed upon. When you file ITR to the income tax return, the income earned from a fixed deposit is denoted under "Income from the other sources". 
• Fixed interest rate: Tax saving FD offers you a fixed rate of interest while other financial instruments like mutual funds and stocks offer 12-20%, even more than that. However, investing in mutual funds or stocks is associated with risks. 
• Interest rate from FD does not beat inflation: Interest rate earned from Fixed deposits rarely beats the inflation in India. 

To conclude, for Investors who have a low-risk appetite or want to save funds in secured assets then tax-saving fixed deposits can be a good option. However, they are not only a saving instrument but also avail tax benefits up to 1.5 lakhs per annum. Also, do your research before choosing any type of fixed deposit.

Tax Saver FD v/s Other Tax Saving Instruments

Tax Saver FDs are the most popular and widely used tax-saving investment instrument. Tax-saving FDs give you a higher interest rate than average fixed deposits, but they also make it easier for you to claim a tax deduction for your returns yearly.

The popularity of Tax Saver FDs is due to their high yield and ease of compliance with tax laws. This is a standard method for ordinary people (not high-net-worth individuals) to save money in India.