Tax Saving FD or Fixed Deposits are a good way to get tax deduction under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to a maximum of Rs. 1.5 lakh by investing in them. The booking period for tax-saving fixed deposits is a minimum of 5 years and a maximum of 10 years. Please note that partial or premature withdrawal is not allowed in tax-saving fixed deposits.
Also, as an investor, you can nominate/authorize someone to withdraw your deposit before or post maturity in the event of your death. However, tax-saving FD is the same as other bank fixed deposits as the maturity amount (Principal + FD Interest) comes directly to your bank account.
Best Tax Saving FD Rates, 2021
|Banks||Tax Saver FD Interest Rates*|
|IDFC First Bank||5.75%||6.25%|
|State Bank of India||5.40%||6.20%|
*Interest rates updated on 8th April 2021
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Benefits of Tax Saving Fixed Deposit
Among various investment instruments providing tax benefits, tax-saving fixed deposits are considered quite safe. Thus, it is a preferred choice for risk-averse investors. Benefits one can enjoy with tax-saving FD are:
- As per Section 80C of the Income Tax Act, 1961, interest earned in such FD schemes qualify for tax deductions
- A maximum of Rs. 1.5 lakh can be claimed as deductions in a financial year
- Such schemes come with a lock-in period of 5 years and tenure can stretch out to 10 years
- Investors get assured returns as well as there is an insurance of Rs. 5 lakh against bank fixed deposits if the bank goes into liquidation or amalgamation/merger (Read more here)
Tax Saving FD vs. other Tax Saving Instruments
Although fixed deposits provide tax-saving options to investors, there are other options available too in which tax benefits are extended. These options include ELSS Funds, PPF (Public Provident Fund), NSS (National Savings Scheme) and NPS (National Pension Scheme). Let’s see how fairly fixed deposit performs in comparison to the other instruments:
|Tax Saving Instrument||Deductions u/s 80C||Interest Rates||Lock-in Period||Taxation|
|Tax Saving Fixed Deposit|
(Banks & NBFCs)
|Up to Rs. 1.5 lakh||5.10% – 6.75% (approx.)||5 years||Interest earned on tax saver FD is taxable as per the Income Tax slab applicable|
|ELSS (Equity Linked Savings Scheme)||Up to Rs. 1.5 lakh||13.38%*||3 years||Returns tax-free as long as returns in a fiscal are up to Rs. 1 lakh|
|PPF (Public Provident Fund)||Up to Rs. 1.5 lakh||7.10%||15 years||PPF falls under EEE taxation regime. Amount invested, interest earned and maturity amount are exempt from tax|
|NSC (National Savings Certificate)||Up to Rs. 1.5 lakh||6.80%||5 years||Interest tax-free for the first 4 years|
|NPS (National Pension Scheme)||Up to Rs. 1.5 lakh + additional Rs. 50,000 u/s 80CCD (1B)||6.92% – 14.29%**||Till Retirement||Income from mandatory annuity purchase is taxed as per slab rate.|
*We have given ELSS category average for 7 years. Ideally, investors of ELSS funds should stay invested for at least 7 years and above to derive the maximum growth potential from an entire business cycle.
**These are historical values. The actual NPS returns might vary.
Despite the recent cuts in fixed deposit interest rates, FDs still continue to top the chart when it comes to tax-saving investments. Investing in a flexible and secure fixed deposit scheme can help you save tax on your annual income. Banks offer different interest rates for regular depositors including individuals, senior citizens, NRIs, and bank staff. The interest rates vary depending on different categories of applicants.
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