Tax-Saving Fixed Deposits: Features, Benefits and More

Fixed deposits have been a popular savings option among Indians for decades, thanks to its guaranteed returns and safety factor. Banks offer a 5-year fixed deposit scheme that is specifically meant for tax-saving. Section 80C of the Income Tax Act, 1961, allows you to claim income tax deductions up to ₹1.5 Lakhs on tax-saving FDs. The benefits and features that are associated with a tax-saving fixed deposit is different from that of a normal fixed deposit account. In this article, we will cover what a tax-saving fixed deposit is and how you can benefit from it.

What Is a Tax-Saving Fixed Deposit?

Tax-saving fixed deposits are those that allow you to claim deductions up to ₹1.5 Lakhs u/s 80C of the Income Tax Act of 1961. They come with a lock-in period of five years where the interest rate remains unchanged throughout the tenor. The interest earned on these FDs is taxable.

Why Should You Invest in a Tax-Saving Fixed Deposit Scheme?

Tax-saving FDs come with various benefits. They are -

Tax exemption: One of the biggest advantages of investing in a tax-saving fixed deposit is that you can enjoy tax benefits of up to ₹1.5 Lakhs in the form of deductions. Parking your funds in tax-saving fixed deposits can reduce your taxable income, thereby allowing you to decrease your tax liability.

Low risk: Tax-saving fixed deposits have lower risk compared to other tax-saving investment options such as ELSS. This is due to the fact that fixed deposits are debt based and do not have any market-linked elements that could potentially influence the interest rate. The interest rate offered by financial institutions, however, remains constant throughout the five-year lock-in period. This means you can watch your savings grow at a steady pace.

Basic eligibility criteria: Anybody that fulfils the basic eligibility criteria can open this FD account. There are no restrictions on investors when it comes to FDs. Salaried and self-employed individuals, businessmen, and NRIs among others are eligible to open a tax-saving fixed deposit account.

Senior citizen benefit: The interest rates offered on tax-saving FDs for senior citizens are higher than those offered to regular citizens. Most financial institutions offer an additional interest rate ranging from 0.25% to 0.50% for senior citizens.

Multiple FDs can be opened: You can open multiple FDs at the same time. They can be either from the same or different financial institution/s. However, the interest income gained from these fixed deposits are exempt from taxation until it reaches the exemption limit of ₹1.5 Lakhs.

Option to open a joint account: Two individuals can come together to open a joint tax-saving fixed deposit account. This allows both to withdraw or deposit money from the account. This makes the fixed deposit account easier to maintain and operate. Minors can also open a fixed deposit along with an adult. Keep in mind that the tax benefits are applicable only to the primary holder of the account.

Minimal investment amount: You can start your tax-saving investment journey with as little as ₹100. This means that you do not have to wait till you save a large corpus before you book a tax-saving FD account.

Easy availability: Most banks offer fixed deposits with tax-saving benefits. You can choose one that best suits your needs and requirements. You can also easily book a tax-saving FD account online. Gone are the days when you had to wait in a long queue to open an FD account.

Guaranteed returns: A tax-saving FD account typically offers greater returns than a savings account. The fixed deposit interest rate typically ranges from 5%-7.5% p.a. Most banks also offer an additional 0.25%-0.50% interest rate to senior citizens over the base interest rate. The returns are guaranteed as your investment is not market-linked.

Nomination facility: Tax-saving fixed deposits allows you to appoint a nominee. That being said, this facility is not available for deposits that are applied and held by or on behalf of a minor.

Anybody that is looking for a tax-saving option and wants guaranteed returns with little-to-no risk can opt for a tax-saving FD. They are virtually risk-free. Tax-saving fixed deposits is a safer investment choice compared to equity-based tax savings options like ELSS as they are debt-based. The amount that you invest is completely protected and the account opening process is simple. You can open an account either online or by physically visiting the bank branch. Different financial institutions offer varying fixed deposit interest rates, therefore it is recommended to compare the interest rates before you make a decision.