Tax saving FD - Fixed deposit is a great low-risk long-term investment instrument. FDs are generally preferred over other types of saving instruments
Tax saving FD – Fixed deposit is a great low-risk long-term investment instrument. FDs are generally preferred over other types of saving instruments such as public provident funds (PPF), equity-linked saving schemes (ELSS), unit link insurance plans (ULIP), and many others. There are several types of FD accounts such as Normal FDs, tax-saving FDs, Flexi FDs, Senior citizen FDs, Cumulative FDs, Non-Cumulative FDs, and others that you can open across different tenures. Despite the recent reduction in interest rates, FDs remain a top tax-saving investment instrument.
Tax-saving FDs is the best way to benefit from tax exemption under the Income Tax Act, 1961 as the amount invested is deducted from the total gross income of an individual to calculate the taxable income. The facility of opening these FD accounts is easily available with public and private banks. Investors can open a tax-saving FD account either with the bank they have an existing relationship with or with any other bank too depending on their interest rates. A drawback of tax-saving FDs is that the principal amount of the investor is locked away for a long period and premature or partial withdrawals, before the 5-year lock-in period, are not allowed without any financial consequences.
Features of Tax-saving fixed deposits
- The minimum amount of tax-saving FDs can vary with different banks with the lowest amount of Rs.100 and the maximum amount is fixed to Rs. 1.5 Lakh per annum.
- The minimum tenure for a tax saving FD is 5 years and the maximum tenure can be stretched up to 10 years.
- However, the interest generated on these FDs on either a monthly or quarterly basis is taxable. Hence the tax is deducted on the interest generated at the source.
- Investors can also appoint a nominee to withdraw their deposit in case of their demise.
- An option of a joint account is also available with most tax-saving FDs.
- In cases of joint accounts with a primary and a secondary account holder, only the primary account holder is eligible for tax benefit.
- Indian individuals, Hindu United Families (HUFs) and minors in a joint account with an adult can invest in tax-saving FDs.
- Investors can also enjoy tax exemption by investing in a Post Office Time Deposit of 5 years which are transferable from one post office to another.
Benefits investors enjoy while investing in tax-saving fixed deposits
- Tax Saving FDs are a good way to benefit from tax exemption under Section 80C of Income Tax Act, 1961.
- Tax exemption of up to Rs. 1.5 Lakh can be claimed by investing in these FDs.
- Just like in other types of FDs, senior citizens can enjoy up to 0.50% higher interest rates than most banks.
- There is an assurance of returns with tax-saving FDs along with insurance of Rs 5 lakh against bank fixed deposits in case of liquidation, cancellation of bank’s licence, or any merger.
Best Interest rates on tax-saving fixed deposits
The prevailing interest rates offered in tax-saving FDs vary with different banks and generally range from 5% to 6.75% and 7.25% for senior citizens. Here’s a list of institutions that offer the best interest rates for tax-saving fixed deposits as of March 2021:
- YES Bank offers an interest of 6.75% for the general public and 7.50% for senior citizens.
- DCB Bank offers an interest rate of 6.75% for the general public and 7.25% for senior citizens.
- IndusInd Bank offers an interest rate of 6.50% for the general public and 7.00% for senior citizens.
- RBL Bank offers an interest rate of 6.25% for the general public and 6.75% for senior citizens.
- IDFC First Bank offers an interest rate of 5.75% for the general public and 6.25% for senior citizens.
- Federal Bank offers an interest rate of 5.50% for the general public and 6.00% for s.50% for the general public and 6.00% for senior citizens.
- .40% for the general public and 6.20% for senior citizens.
- for the general public and 5.60% for senior citizens.
- HDFC Ba% for the general public and 5.80% for senior citizens.
With generally high prevailing interest rates of tax-saving FDs with these banks, an investor can generate interest and save tax at the same time. However, it is necessary to do your research before deciding on the bank you want to invest in. Every bank has its own terms & conditions with every service they provide. It’s important to go through and understand all the necessary paperwork to avoid any complications in the future.