Investing in tax saving FD

Fixed deposits (FDs) are financial instruments that provide a fixed rate of return on a lump sum amount deposited for a specific period. While FDs are ideal for conservative investors, the tax deducted at source (TDS) is relatively high. But tax-saver FDs have the additional benefit of tax deductions from your income on the invested amount under section 80C of the Income Tax Act. Here, you look at tax saving fixed deposits, their features and how they fare against other investment options available in the market.

What are tax saving fixed deposits?

Investing in a tax saving FD allows investors to avail tax deductions under Section 80C of the Income Tax Act. These FDs have a lock-in period of 5 years and yield interest of 6.50% to 7.75% per annum. Unlike other fixed deposits, tax-saver FDs you can’t prematurely withdraw your money. You also can’t avail a loan (overdraft) against tax-saver FDs. 

Features of Tax Saver FDs: 

Some of the features of tax-saver FDs are listed below. 

• Tax benefit - The amount you invest each financial year in tax-saver FD can be claimed as a deduction under Section 80C of the Income Tax Act. The upper limit for deduction under the section is Rs 1.5 lakh.

• Interest is subject to TDS - The interest earned on the invested amount is subject to tax based on your tax bracket. It is also subject to tax deduction at source (TDS) if annual interest exceeds Rs 40,000 for general citizens and Rs 50,000 for senior citizens in a financial year. 

• Lock-in period - Tax saver term deposits come with a lock-in period of 5 years. As such, investors can’t withdraw their funds before maturity. However, in case of the account holder’s death, the amount is transferred to the nominee with no penalty imposed.

• Nomination - Tax saving FDs comes with the facility of adding a nominee. It can be done to ensure that the invested amount is transferred to the nominee in case an unforeseen situation arises like death of the primary investor within the investment tenure. 
  
  

Read : How are equity mutual funds taxed?

How to open a tax-saver FD?

You can open a tax-saver fixed deposit with a bank either online or offline. Mentioned below is a step-wise guide on how to go about opening it based on the option (online or offline) you chose.

Online mode 

Let us look at the steps for opening a tax-saving term deposit online with State Bank of India - 

Step 1: Enter your credentials on the bank’s net banking portal to log in

Step 2: On the dashboard, look for the ‘Investment’ option

Step 3: Select ‘Tax Saving Fixed Deposit’ 

Step 4: Enter the amount you want to invest in the tax-saver FD

Step 5: Proceed and select the account from where the money is to be deducted. 

Step 6: Accept the terms and conditions, click on ‘submit’ and ‘confirm’

Offline mode

If you are not comfortable with the online mode, you may consider opening a tax-saver FD by visiting your nearest bank branch. Following the steps mentioned below will enable you to complete the process without much hassle - 

Step 1: Visit the nearest branch of your bank

Step 2: Fill the application form for opening a tax-saving FD

Step 3: Submit the form along with the necessary documents to the concerned bank official 

Step 4: Pay the investment amount via cheque/cash/existing bank account

Step 5: After successful verification and processing of the application, your account will be opened as per the bank’s specified timeline

Documents required for opening a tax-saver FD

When opening a tax-saving FD with a bank where you don’t have an existing account, you will need to submit the following documents along with the application form:

• Identity proof - You need to submit identity proof like PAN, voter ID, passport government ID, driving licence, etc. along with the application form. 

• Address proof - You need to submit proof of address when opening a tax-saver FD. Documents like - passport, telephone bill, electricity bill, bank statement can be submitted with the application form.
  
  

Comparison between tax-saver FD and other tax saving options

Here is an overview of tax-saver FD compared to other investment options under section 80C of the Income Tax Act

* The rate of return mentioned here is for the April - June quarter of FY24 **Changeable on a quarterly basis 
#The interest rate mentioned is for the July - September quarter 2023-24

The offered returns on tax-saver FD are fixed and not market-linked. The offered rate of return varies from bank to bank. Do your research or consult a financial advisor before investing in these FDs. 


Disclaimer - This article is for information purposes only and should not be considered investment advice. Please consult your financial advisor and/or carry out your own research on any of your planned investments.