Best Tax-Saving Fixed Deposits To Reduce Your Income Tax Liability
Tax-saving fixed deposits (FDs) offer a secure investment option with guaranteed returns, while providing tax benefits under Section 80C of the Income Tax Act, 1961.
Traditional investment instruments, like fixed deposits and government-backed savings schemes, are back on the radar of investors amid the ongoing stock market turmoil. Many investors are prioritising safety over high returns, opting for financial instruments that offer steady returns even if they yield lower profits compared to riskier options like stocks and equity instruments.
If you are looking forward to the dual benefit of secured returns and savings on income tax, tax-saving FDs could be a suitable choice for your investment portfolio. Fixed Deposits (FDs) remain a popular choice among risk-averse investors. Several FDs also provide tax benefits under Section 80C of the Income Tax Act.
With financial year 2024-25 ending in a few days, you can still plan your investments to save more on your total income tax liability. You can claim deductions on investments in tax-saving FDs under the old tax regime.
What are tax-saving fixed deposits?
Tax-saving FDs are deposit schemes that allow people to claim a deduction of up to Rs 1.5 lakh annually under Section 80C of the Income Tax Act, 1961. These deposits come with a mandatory lock-in period of five years.
The interest rate remains fixed for the entire tenure, ensuring stable returns regardless of market fluctuations. But the interest earned is subject to taxation and is deducted at source (TDS) by the bank.
How do tax-saving FDs work?
Tax-saving fixed deposits operate similarly to traditional FDs. Investors deposit a lump sum amount with a bank or financial institution for a pre-defined tenure, earning a guaranteed return over the entire period at a fixed interest rate.
Most tax-saving FDs come with a five-year lock-in period, meaning that the funds cannot be accessed during this period. Upon completion of the maturity period, the accumulated corpus is paid out after deducting TDS on the interest earned. The TDS will be applicable when the interest earned surpasses Rs 40,000 in a financial year.
Banks and their tax-saving FD interest rates
Many banks in India offer competitive interest rates on tax-saving FDs, making them an attractive option for those looking to minimise their taxable income.
Here’s a look at the interest rates offered by 5 banks:
ICICI Bank: General citizens earn 7.25%, while senior citizens receive 7.80%.
HDFC Bank: General depositors enjoy a 7% interest rate, while senior citizens get 7.50%.
Axis Bank: Investors can deposit as low as Rs 100, with interest rates of 7% for general citizens and 7.75% for senior citizens.
State Bank of India (SBI): Offers 6.5% per annum for general depositors and 7.5% per annum for senior citizens under the SBI Tax Savings Scheme.
Kotak Mahindra Bank: Provides 6.2% per annum for general citizens and 6.70% per annum for senior citizens for deposit tenures between five and 10 years.
Benefits of tax-saving fixed deposits
Guaranteed growth: Interest compounds over the FD’s tenure, ensuring steady capital appreciation.
Low risk: Fixed deposits are considered one of the safest investment avenues, with negligible risks compared to market-linked instruments.
Stable returns: Unlike mutual funds, tax-saving FDs offer predetermined interest rates, making them a reliable option for conservative investors.
Higher interest for senior citizens: Most banks offer an additional 0.25% to 0.5% interest to senior citizens, making these deposits more lucrative for retirees.
Tax deduction: Deposits qualify for deductions under Section 80C, allowing savings of up to Rs 1.5 lakh annually.
Things to remember before investing in tax-saving FDs
Only individuals and Hindu Undivided Families (HUFs) can invest. Minors can invest jointly with an adult guardian or any of the parents.
Minimum deposit amount varies across banks, but there is no upper limit for investment. However, tax deductions can be claimed within the Section 80C limit of Rs 1.5 lakh per financial year under the old tax regime.
Premature withdrawals are not allowed during the five-year lock-in period.
Loans cannot be availed against tax-saving fixed deposits.
Tax-saving FDs could be a great investment tool for those looking to balance safety, returns, and tax benefits. While they may not offer the high returns associated with equity investments, their guaranteed returns and risk-free nature make them a reliable choice for many investors.
