Investing in Tax Saving Fixed Deposits

Learn everything about tax-saving FDs.

Fixed Deposits (FDs) are financial instruments that provide a fixed rate of return on a lump sum amount deposited for a specific period. While FDs are ideal for conservative investors, the tax deducted at source (TDS) is relatively high. However, tax-saver FDs offer the additional benefit of tax deductions from your income on the invested amount under Section 80C of the Income Tax Act. This article examines tax-saving fixed deposits, their features, and how they compare against other investment options available in the market.

What Are Tax Saving Fixed Deposits?

Investing in a tax-saving FD allows investors to avail tax deductions under Section 80C of the Income Tax Act. These FDs have a lock-in period of 5 years and yield interest rates ranging from 6.50% to 7.75% per annum. Unlike other fixed deposits, tax-saver FDs do not allow premature withdrawals or loans (overdrafts) against them.

Features of Tax Saver FDs

Tax Benefit: The amount you invest each financial year in a tax-saver FD can be claimed as a deduction under Section 80C of the Income Tax Act. The upper limit for deduction under this section is Rs 1.5 lakh.
Interest is Subject to TDS: The interest earned on the invested amount is taxable based on your tax bracket and subject to tax deduction at source (TDS) if the annual interest exceeds Rs 40,000 for general citizens and Rs 50,000 for senior citizens in a financial year.
Lock-in Period: Tax saver term deposits come with a lock-in period of 5 years, meaning investors cannot withdraw their funds before maturity. However, in the event of the account holder's death, the amount is transferred to the nominee without penalty.
Nomination: Tax-saving FDs allow for the addition of a nominee, ensuring that the invested amount is transferred to the nominee in case of unforeseen circumstances, such as the death of the primary investor during the investment tenure.

How to Open a Tax-Saver FD?

You can open a tax-saver fixed deposit with a bank either online or offline. Below is a step-by-step guide for both options:

Online Mode

Enter your credentials on the bank’s net banking portal to log in.
On the dashboard, look for the ‘Investment’ option.
Select ‘Tax Saving Fixed Deposit’.
Enter the amount you wish to invest in the tax-saver FD.
Proceed and select the account from which the money will be deducted.
Accept the terms and conditions, click on ‘submit’ and ‘confirm’.

Offline Mode

If you prefer not to use the online mode, you can open a tax-saver FD by visiting your nearest bank branch:

Visit the nearest branch of your bank.
Fill out the application form for opening a tax-saving FD.
Submit the form along with the necessary documents to the concerned bank official.
Pay the investment amount via cheque/cash/existing bank account.
After successful verification and processing of the application, your account will be opened according to the bank’s specified timeline.

Documents Required for Opening a Tax-Saver FD

When opening a tax-saving FD with a bank where you do not have an existing account, you will need to submit the following documents along with your application:

Identity Proof: Submit identity proof like PAN, voter ID, passport, government ID, driving license, etc.
Address Proof: Provide proof of address, such as a passport, telephone bill, electricity bill, or bank statement.

Comparison Between Tax-Saver FD and Other Tax-Saving Options

Here’s an overview comparing tax-saver FD to other investment options under Section 80C of the Income Tax Act:

Tax-Saving Instruments	Lock-in Period	Rate of Returns
Tax-Saver FD	5 years	Varies across banks
Equity-Linked Savings Scheme (ELSS)	3 years	10 - 12%
Public Provident Fund (PPF)*	15 years	7.10%
Unit-Linked Insurance Policy (ULIP)	5 years	Market-based
Sukanya Samriddhi Yojana (SSY)**	21 years	8%
National Savings Certificate (NSC)#	5 years	7.70%
National Pension Scheme (NPS)	Until retirement	Market-based

*The rate of return mentioned here is for the April - June quarter of FY24. **Changeable on a quarterly basis. #The interest rate mentioned is for the July - September quarter 2023-24.

The returns on tax-saver FDs are fixed and not market-linked. The offered rate of return varies from bank to bank. It is advisable to conduct thorough research or consult a financial advisor before investing in these FDs.

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