Are all FDs tax saving? What is Tax Saving Fixed Deposit?

Fixed deposit

A tax saving FD or Fixed Deposit is a financial investment instrument offered by banks & NBFCs where you can deposit money and get a higher rate of interest than a normal savings account. Your investments under this scheme are exempt from tax deductions as per section 80C. A regular FD may offer higher returns but does not offer tax benefits. In other words, there are two type of Fixed Deposits, Tax saving and Non-tax saving. In this article, let us understand everything about a tax saving fixed deposit, including its features, benefits, and all you need to know to invest in it.

Tax Saving Fixed Deposit 

A tax saving FD is a type of fixed deposit in which the individual can claim a tax deduction under Section 80C of the Income Tax, 1961. These deposits can be made through two types of accounts- Single holder Type Deposits and Joint holder Type Deposits.

If you opt for a joint mode of holding, generally, the tax benefit is only available to the first holder. The maturity period of the tax saver fixed deposit is 5 years. Deduction under section 80C is available to the Hindu Undivided Family (HUF) and individuals.

Read Also: Post Office Interest Rates April–June 2022 on FDs, PPF, NSC, KVP, MIS, SCSS and SSY Schemes

How Does a Tax Saving FD Work? 

Here’s a basic overview of how a tax saving FD works: –

  • It is a financial provision offered by banks and NBFCs, where you deposit a lump sum of money for a fixed period or tenure.
  • The tenure for a tax saving fixed deposit is 5 years.
  • It offers a tax deduction under Section 80C
  • It has a lock-in period which means that you are not allowed to withdraw prematurely.
  • The interest earned on the deposits is taxable.
  • At the time of maturity of a tax saving FD, the maturity amount is credited to your savings account associated with the FD.

Read Also: Avoid income tax notices, understand how to report bank FD interest on your ITR

Key Features of a Tax Saving FD 

You can build adequate funds over time by investing in a tax saving FD. It not only offers good returns but also offers tax benefits. Here are some of the key features of a tax saving FD: –

1. Tax Exemption

With a tax saving FD, you can avail of income tax exemption under Section 80C of the IT Act, 1961. It can be claimed on investment of up to Rs 1.5 lakh

2. Lock-in Period

A tax saving fixed deposit has a lock-in period of 5 years. The interest rates also remain unchanged over the five-year period

3. Taxable Interest

The interest earned, as a part of the Tax Saving FD, is taxable and is deducted at the source.

4. No Premature Withdrawals

A regular FD offers loan facilities against deposits. However, premature withdrawals, overdraft (OD), or loan facilities are not available for a Tax Saving FD.

Read Also: ITR: 5 common bank transactions mistakes to avoid in tax return

5. No Auto-Renewal Option

There is no auto-renewal facility for a Tax Saving Fixed Deposit.

6. Flexible Interest Pay-outs

Under a tax saving FD you have the flexibility to receive interest pay-outs at your convenience. You can opt for monthly or quarterly pay-outs or choose to reinvest in the principal amount.

7. Other Features

Interest rates differ from bank to bank, and rates for Indian citizens, Hindu Undivided Family (HUF) also vary. A Tax Saving FD can be held in a single or a joint mode. If it’s a joint Tax Saving Fixed Deposit, tax benefits are available only to the first account holder.

Read Also: Save Tax : 20 Ways to save Income tax in India

Benefits of a Tax Saving FD 

A tax saving FD is a safe investment option that comes with extensive benefits. Here are some of the key benefits provided under this scheme: –

1. High Returns

A Tax saving fixed deposit has a higher interest-earning potential than savings accounts.

2. Lump Sum Deposit

With a tax saving FD, you can make a one-time lump sum deposit. It is a convenient feature if you have sizable surplus savings

3. Minimum Lock-in Period

The minimum tenure for receiving tax benefits is five years. However, it can be extended for a longer tenure.

4. Secure

A tax saving FD is totally secure. There are no market fluctuations that affect the interest rates, as in the case of Mutual Funds and other market-related investment options. The tax saving FD interest rates also remain fixed until it reaches maturity.

5. Flexible Deposit Amount

FDs offer flexibility in the deposit amount based on the investor’s convenience.

6. Tax Benefits

You can get income tax deductions up to Rs.1,50,000 per annum under Section 80C of the Income Tax Act, 1961.

ParticularsTax Saving FDOther 80C investments
Tenure5-year lock-in periodMinimum 5-year lock-in period, Can be extended up to 10 years
Tax DeductionsUp to Rs.1,50,000 p.a. under Section 80CUp to Rs.1,50,000 p.a. under Section 80C
Tax ImplicationWill be taxed under the head Other IncomeInterest taxed based on income slab

Who Can Invest in a Tax Saving FD? 

Here are the entities that can invest in a tax saving FD: –

  • Indian Residents
  • Individuals
  • Hindu Undivided Families (HUF)
  • A minor can invest jointly with an adult.
  • A tax saving FD can be opened in single and joint accounts.
  • You can invest in a tax saving FD through any public or private bank except cooperative and rural banks.

How to Avoid Tax Deduction on FD? 

Here are a few ways you can follow to avoid TDS on FDs:

1. By submitting Form 15G/15H

If you submit Form 15G stating that you have no taxable income, the bank will not deduct any TDS on the interest earned. 15H is the requisite form for senior citizens.

Read Also: Claim lower/nil TDS deduction- Form 15G, Form 15H and Form 13

2. Timing the FD

You can avoid tax deduction by timing your FD such that the interest for any financial year is not more than ₹ 10,000.

3. Splitting the FD

You can avoid tax deduction on FD by starting one FD under your personal bank account and another one under a HUF account. This way, both will be treated as separate.

Documents Required | Tax Saving FD 

The following documents are needed to open a tax saving fixed deposit: –

With a tax saving FD, you can make a one-time lump sum deposit. It is a convenient feature if you have sizable surplus savings

  • Government-recognized ID proof:
  • Aadhaar Card
  • Driving License
  • Passport
  • Ration Card
  • Voter ID Card
  • Government-recognized address proof
  • Proof of age (for senior citizens)
  • 2 recent colour passport-size photographs

Taxation On FD Earnings 

If you wish to save tax, read along to know the taxation policy on Fixed deposit savings-

In the case of a simple fixed deposit, you can opt for the five year tax saving FD, and benefit from exemptions under section 80c of the income tax act.

However, when we focus on the tax saver fixed deposit, the key advantage it offers is that a Tax Saving FD is not market-linked. While Equity Linked Savings Scheme (ELSS) has a lower lock-in period of three years, the minimum investment required is Rs 500. Also, ELSS comes with some risk as it is market-linked. The minimum investment required in a Tax Saving Fixed Deposit is Rs 100. While you can open a PPF Account with an opening balance of Rs 100, the minimum investment has to be Rs 500. Also, a PPF comes with a lock-in period of 15 years.

Read Also: Income Tax on Mutual Fund Redemption

Frequently Asked Questions

1. Are there any tax benefits associated with an FD?

A: The interest you receive on your Fixed Deposit amount is taxable. However, you can submit Form 15G to the bank to avoid tax deduction.

2. What is the minimum amount required to open a tax saving FD account?

The minimum investment that can be made for a tax saving FD account is Rs. 100.

3.  What is the investment limit for a tax saving FD?

The maximum investment limit for the tax saving FD is Rs.1.5lakh per financial year.

4.  What is the tenure of a tax saving FD?

A tax saving FD has a lock-in period of 5 years. No premature withdrawals, overdrafts, or loan facilities are available under a tax saving FD.

5.  What happens at the time of maturity of a tax saving FD?

At the time of maturity of a tax saving FD, the maturity amount is credited to your savings account associated with the FD.

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