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Income Tax Saver Fixed Deposits : Must Know Facts

During 2005, banks were losing key investments due to thinning popularity of fixed deposits due to frequent reduction in interest rates.  The fixed deposits which were giving interest rates up to 12-14% or more some 5-10 years ago, had slumped down to about 7-9 %. On the other side, with the opening up of insurance sector & growing popularity of mutual funds in India, many new companies smell the big opportunity to trap these dissatisfied banking customers by offering some new & vibrant options.

Banker’s association started lobbying for Government support in this scenario. Convinced with their position the Indian government announced in 2006 vide notification no. 203/2006 dated 28-07-2006 that, bank fixed deposits booked by an individual/HUF for 5 years and up to Rs. One Lac or Rs. 100,000/- will be eligible for exemption under section 80C of Income Tax Act,1961.

This is the same section where we take exemption for life insurance policies, Mutual Funds, etc with a generally higher rate of return. However, as soon as the announcement from income tax department came, fixed deposit regain the lost ground with an effective return of about 11-13 %     [for the highest tax bracket].

But this announcement comes with many terms & conditions & without complying of those, one can not get this exemption. For a common person , this provision means : FD of 5 years will be tax saving instrument. But, in actual terms, there are lot more to adhere for getting the IT benefits. The main conditions are highlighted hereunder :

1.      Fixed Deposit for Above 5 Years


The one restriction on choosing term deposit is, it should be minimum of five years. According to the section 80c

“The maturity period of a term deposit receipt of any denomination shall be five years commencing from the date of the receipt”.

2.      Deposit in Scheduled Banks

The deposit should be made in the RBI mentioned Scheduled Banks. If you are depositing in any other banks, then it is not possible to show in the tax savings.

3.      Lock-in period

These FDs have a lock-in period of 5 years. This means that once you invest, you can not withdraw the amount for 5 years. These FDs can not be pledged for any reason for these 5 years.

4.      Appearance

These FDs contain the PAN no. of the investor. Banks also mentions the “tax saver status on the FD instrument”. It can be procured in the multiple of Rs. 100/-.


5.      No sweep-in facility

This tax saver fixed deposits do not have the sweep-in facility. It means that this fixed deposit cannot be linked to a savings account and the surplus funds available under the savings account cannot be automatically invested in this fixed deposit. In addition to it there is no overdraft facility available on the tax saver fixed deposit. As this instrument of saving money is special due to its tax saving status

6.      Fixed Deposit in Joint Name

In case two people invest in a tax saver fixed deposit, and become joint holders of the same, the tax benefits under the section 80C of income tax act will be available to the 1st holder. The second holder won't be able to enjoy any tax deduction benefits on such a jointly held tax saver fixed deposit. Only an Indian resident or Hindu undivided families (HUF) are eligible for these tax saver fixed deposit.

7.      Interest is Taxable


The interest earned on these FD is taxable. This is one negative feature on this scheme. Unlike Post Office Savings are tax free, this is taxable income and you have to pay the tax for it.



This article explains the benefits on using the Fixed Deposit as the Tax Savings scheme. So, if you miss the deadline of investing in other options, such as mutual funds or insurance plans, instead of going for some hasty decision, simply for the sake of tax saving, just go for this safest avenue of tax saver instrument.


Published by

CMA. Subhash Kumar Jha
(General Manager - Finance)
Category Income Tax   Report

2 Likes   127 Shares   39336 Views


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