Tax Saving FDs: How To Save Tax By Investing In Fixed Deposits?

Fixed deposits are a popular investment option for those looking to save funds for the future. There are numerous types of FD accounts that offer a variety of tenures and interest rates. However, one of the most beneficial accounts is the five-year FD scheme that is specifically designed for tax-saving purposes. In this article, we will discuss how to save tax with fixed deposits and what you need to know about these accounts.

A tax-saving fixed deposit (FD) is a specific type of fixed deposit account that offers tax deductions under Section 80C of the Income Tax Act, 1961. Taxpayers can claim a maximum deduction of up to ₹1.5 lakh per year by investing in tax-saving fixed deposits. These accounts have a lock-in period of 5 years, and the interest earned is taxable. The rate of interest ranges from 5.5% – 7.75% and can differ depending on the banks.

FDs are a low-risk investment option and provide fixed interest returns upon maturity. The benefits of FDs include a higher interest-earning potential than savings accounts, a one-time lump sum deposit, and flexibility in deposit amounts based on the investor's convenience. Importantly, investors can get tax deductions up to ₹1.5 lakh per year on tax saving fixed deposits as per Section 80C of the Income Tax Act, 1961. However, a premature withdrawal facility is generally not available in tax saving FDs.

To open a tax-saving fixed deposit account, investors need to provide identity proof, such as Aadhaar, Voter ID, PAN, Passport, Senior Citizen card, Driving License, and address proof, such as Telephone/Electricity Bill, Passport, Bank Statement with Cheque, etc.

Anyone looking for secure and guaranteed returns with a tax-saving option should invest in tax-saving FDs. Investing in a tax-saving fixed deposit is also quite easy. A tax-saving FD can be opened via an account online or by visiting a bank branch. Banks offer different interest rates on tax-saving FDs, so it’s a good idea to compare rates from differing banks before investing. Moreover, tax-saving fixed deposits are risk-free. The amount invested is completely protected, and the returns are guaranteed.

• Tax-saving FDs have a fixed rate of interest that remains the same during the tenure of the FD. The rates of interest for Indian citizens, NRIs and HUFs may differ from bank to bank and are changed on a regular basis. Bank staff members and senior citizens generally benefit from higher interest rates. 

• The minimum investment that you can make in a tax-saving FD is ₹100, whereas the maximum limit for investment is ₹1.5 lakh per annum. 

• Tax-saving fixed deposits have a lock-in period of five years, which means that the deposited amount cannot be withdrawn prematurely. Another important point to note is that no loan or overdraft facility is available against tax-saver fixed deposits. Therefore, it's essential to consider the duration of the investment before opening a tax-saving FD account. 

• Tax-saving fixed deposits also offer a nomination facility, which means that you can nominate a person who will receive the maturity amount in case of your untimely demise. Moreover, a tax-saving fixed deposit account can be transferred from one branch of a bank to another.

Also Read: Important Things To Keep In Mind While Investing In Tax Saving FDs.

Resident Indian citizens, senior citizens, Hindu Undivided Families (HUFs), and Non-Resident Indians (NRIs) can invest in tax-saving fixed deposits. However, it's important to check with the bank regarding their specific eligibility criteria before investing.

When the fixed deposit term ends, the maturity amount will be transferred to the savings bank account associated with the FD account. Therefore, it's crucial to ensure that the savings account linked to the FD account is active and accessible upon maturity.

Also Read: 8 Last Minute Tax Saving Investments To Make