Tax-Saving Fixed Deposits: All You Need to Know

Want to earn safe returns and save taxes? Consider investing in tax-saving fixed deposits. The money invested in these deposits ensures stable returns regardless of market turbulence while allowing you to claim tax deductions from your gross income each month. This, in turn, reduces your taxable income. You can get tax deductions of upto INR 1.5 lakh in a financial year as per Section 80C of the Income Tax Act. So, if you have surplus money, tax saving fixed deposits are to go with. But before choosing this option, let’s have a look at what it is, how it works and other details. In this blog, we’ll share everything so that you can decide better.

What is a Tax Saving Fixed Deposit?

It’s the same as a regular fixed deposit with a few differences. You deposit a fixed lump sum amount for a fixed period at fixed interest rates, the same as a regular fixed deposit. The difference, however, is that a tax-saver fixed deposit comes with a 5-year lock-in period and an investment cap of INR 1.5 lakh in a financial year. Two meanings emerge from this difference. One, you can’t withdraw before five years. Secondly, the minimum deposit period here remains five years. Whereas in a regular fixed deposit, you can pull out your investments anytime. 

Coming back to a tax-saver fixed deposit, tax deductions of upto INR 1.5 lakh in a financial year are allowed only on the investment amount. The interest on tax saver FDs is taxable. However, taxes will apply only when the interest earned crosses the threshold limit set by the government. The threshold limit for regular customers and senior citizens is INR 40,000 and INR 50,000, respectively, in a financial year. A Tax Deducted at Source (TDS) of 10% is applied if the interest earned crosses the limit shown above.

Key Features of Tax Saving FDs

Minimum and Maximum Deposit Allowed

The minimum deposit allowed in a tax-saver fixed deposit depends on a particular bank. Some banks may allow you a minimum deposit of INR 100, some with INR 1000 and so on. However, the maximum deposit allowed is capped to INR 1.5 lakh in a financial year. 

Interest Calculation

Tax saving fixed deposits bear fixed interest rates. Now it depends on you whether you want to reinvest interest or receive payouts depending on the frequency you choose - monthly, quarterly or annually. With a reinvestment option, the interest accrued on the same is usually reinvested or added to the principal amount every year. On maturity, you will get the entire amount (Principal + Reinvested Interest). This feature allows you to earn more compared to when choosing the payout option.

You cannot make premature withdrawals from a tax saver fixed deposit before maturity. However, depending on the bank’s policy, you can do so after completing the lock-in period. The same thing applies to a loan against a tax saving FD. 

How to Calculate Returns on a Tax Saving Fixed Deposit?

Calculating the returns on a tax saving fixed deposit is no longer a thankless exercise. We at BharatFD provide you with an FD calculator that computes your maturity amount in seconds. Here’s a list of the advantages you have when using the FD calculator online. 

Easy to Use

The FD calculator is easy to use as you just need to input the principal amount, interest rate, period of deposit or tenure and compounding frequency at their respective places, and that’s it! You will get to see the interest and maturity amount. 

Error-free 

The powerful algorithms embedded in the calculator ensure precise calculations. When calculating manually, one may commit errors.

Financial Planning

FD calculators can help you decide the right investment amount for your financial goals. By experimenting with different investment values, you can calculate the amount you will earn at the prevailing interest rate. 

Formula to Calculate Returns on a Fixed Deposit

The calculator uses the following formula to compute the maturity value (inclusive of interest). 

Maturity Amount = P (1+R/N)^(N*T)

P = Investment Amount

R = Rate of Interest 

T = Investment Tenure

N = The Number of Compounding in a Year

Factors Affecting the Earnings on a Tax Saving FD

Investment Amount: The amount of investment you make greatly influences your absolute earnings. The more you invest, the greater your earnings will be and vice versa.

Interest Rate: It’s a no brainer that higher interest rates lead to higher earnings. However, the eventual earnings for individuals can still vary depending on the compounding frequency option they choose. Banks usually offer monthly, quarterly or annual interest compounding frequency. The interest accrued on a tax saving fixed deposit will be added to the principal amount every month, quarter or year depending on the frequency you choose. As per the calculator’s results, monthly or quarterly compounding frequency can lead you to more earnings than the annual compounding frequency option. 

Investment Tenure: This factor is way more critical when calculating the maturity amount on a fixed deposit. Letting the investment amount stay for a long time does help raise your returns higher compared to when doing it for a shorter period. However, the rate of interest remains relatively higher in a 3-5 year deposit compared to a 7-10 year deposit. The interest rate will play a role here. So, experiment with different investment times and the prevailing interest rates during these to determine the time for which you should stay invested to achieve your goal amount. You can always check the interest rates of banks on BharatFD for relevant calculations. The rates shown on our platform are updated, so you can trust us.

Tax-saving Fixed Deposit Interest Rates Across Banks

Nomination Facility

Banks allow a nomination facility for depositors opening a tax saver fixed deposit account. With this, you can nominate your family members and make them eligible to receive fixed deposit proceeds in case you die when the tax saver fixed deposit is already running. They need to present your death certificate along with their identity and address proofs to receive the FD amount.

Advantages of Tax Saving FDs

Tax-saver fixed deposits offer a wide range of benefits to investors that help them achieve their financial goals over time. Let’s check out some of their benefits below. 

Secure and Guaranteed Returns, Shorter Lock-in Period Make Tax Saver FDs Stand Out

No matter whether the market goes up or down, your money will remain safe. So, if you book a fixed deposit for 5 years at 9.30% per annum, it will remain the same even if banks cut the rates later for new customers. You will get money on maturity at the same 9.30% per annum. The same thing can’t be said about all of its competing products. 

While Public Provident Fund (PPF), National Savings Certificate (NSC), Sukanya Samariddhi Yojana (SKY) offer guaranteed returns, Unit-linked Insurance Plan (ULIP), Equity-linked Savings Scheme (ELSS) and National Pension Scheme (NPS) offer market-linked returns that can go up or down depending on the market movement. If markets surge, the returns will be higher and remain lesser when they fall.

Tax-saver fixed deposits come with a lock-in period of five years. The same lock-in period applies in the case of ULIPs and NSCs. However, the lock-in period for PPF, SKY and NPS remains at 15 years, 21 years and till retirement, respectively. ELSS has the shortest lock-in period i.e. three years. However, investments in ELSS are prone to market risks. So, looking at aspects such as capital safety and the overall duration for which the money will stay locked, tax-saver fixed deposits come as a better alternative, at least for risk-averse investors.

Perfect for Investors Seeking Tax Savings

If you are someone seeking tax savings, tax saving fixed deposits are one of the best options to go with. It offers you tax deductions of upto INR 1.5 lakh in a financial year. So, if you invest INR 1.5 lakh in a financial year, it will be deducted from your gross income while computing your taxable income. This, in turn, reduces your tax liability and you will take home more every month.

Who can Invest in a Tax Saver Fixed Deposit?

Both resident Indians and Hindu Undivided Families (HUFs) are eligible to invest in a tax saving FD and gain tax deductions. 

Who Should Invest in a Tax Saver Fixed Deposit?

A tax-saver fixed deposit account will likely suit risk-averse investors seeking safe returns while eyeing tax savings. These investors can also include retirees whose risk appetite remains substantially lower than their younger counterparts.

How can I Open a Tax Saving FD?

You can open a tax saving fixed deposit account in a few steps on BharatFD, a fixed deposit marketplace that has partnered with trusted banks across India. Here are the steps-

• Visit the official website of BharatFD.

• Compare and choose the tax saver fixed deposit with the highest interest rates.

• Click on ‘Book This FD’.

• Afterward, enter your investment amount and time and click on ‘Invest’. 

• Enter PAN, Aadhaar, bank account and nomination details.

• Give consent to the fixed deposit amount deduction.

• Your tax-saver fixed deposit account will be opened.

• You will receive an email and SMS notification from BharatFD and the partner bank whose fixed deposit you book on our platform.

Documents Required to Open a Tax Saving Fixed Deposit Account at a Bank Branch

Investors need to submit the following to open a tax saving fixed deposit account. 

Identity Proof - PAN Card, Aadhaar Card, Passport, Voter ID or any other documents proving your identity

Address Proof -  Aadhaar Card, Passport, Voter ID, Telephone Bill, Electricity Bill, Bank Statement or any other documents proving your residence

Recent Passport Size Photographs

Documents Required to Open a Tax Saving Fixed Deposit Account with BharatFD

With BharatFD, you just need to submit PAN and Aadhaar, and it's done!

Final Words

As a taxpayer, using a tax saver fixed deposit will help you save on your taxes effortlessly while allowing you to reap safe and high returns. So, if you are someone with a low-risk appetite, consider investing in it to grow your money. With BharatFD by your side, your tax saving FD investment journey will be even more rewarding. It has partnered with trusted banks across India with high interest rates. Compare, choose and enjoy your journey with us.

FAQs

What is a Tax Saving Fixed Deposit?

A tax saving fixed deposit is a type of fixed deposit that helps you save taxes. With this, you can get tax deductions of upto INR 1.5 lakh in a financial year according to Section 80C of the Income Tax Act, 1961.

What is the lock-in period for Tax Saving FDs?

The lock-in period for tax saving FDs is five years.

Who can invest in a Tax Saving FD?

Resident Indians and Hindu Undivided Families can invest in a tax saving FD.

What is the minimum and maximum investment amount for Tax Saving FDs?

The minimum investment amount can be INR 100, 1000 or even 5,000 in a financial year, depending on the bank’s norms. The maximum investment is, however, capped to INR 1.5 lakh in a financial year.

Can senior citizens invest in Tax Saving FDs?

Yes, senior citizens can invest in tax saving FDs and get an additional interest rate of 0.50% on their deposits.

What documents are required to open a Tax Saving FD?

Banks will ask you to submit a few identity and address proof documents along with your recent passport size photograph. Documents include PAN, Aadhaar, utility bills, etc. With BharatFD, you just need to submit your PAN and Aadhaar.

How are Tax Saving FDs different from other 80C investments like ELSS or PPF?

Tax saving FDs and their competing 80C investments such as ELSS or PPF offer tax deductions of upto 1.5 lakh in a financial year. However, the lock-in period of tax saving FDs is different from these two. The lock-in period of tax saver fixed deposits is five years, the same for ELSS and PPF is 3 years and 15 years, respectively.

What happens if I invest more than ₹1.5 lakh in a Tax Saving FD?

You can’t invest more than INR 1.5 lakh in a tax saving FD in a financial year. 

Can I get interest payouts during the tenure of a Tax Saving FD?

Yes, you can! You will need to choose the interest payout option instead of interest reinvestment for the same.