Fixed deposits or FDs are preferred investment instrument for risk-averse investors as they provide capital safety and assured returns. However, investment in a regular FD does not fetch you tax deduction benefits. But a tax-saving FD doubles up as an investment as well as an 80C tax saver.
Tax-saver FDs are similar to regular FDs, but have additional features like the lock-in period. The tax-saver FD has a lock-in period of 5 years, which means you can only withdraw it after five years. If you invest in tax-saver FDs, you can claim tax deductions under Section 80C of the I-T Act, which allows a deduction of up to Rs. 1.5 lakh.
The interest earned is taxable just like a regular fixed deposit. The tax rate (TDS) is 10% on FD interest if it is more than Rs. 10,000 in a year. The tax on interest is deducted at source, but you can avoid it by filing Form 15G (Form 15H for senior citizens). In that case, the interest is added to your income and taxed at your applicable slab tax rate. Unlike regular FD, you cannot borrow against tax-saver FDs.
Interest Rates On Tax-saver FDs
Interest rates vary from one bank to another. It is thus important for investors to go through various banks’ offerings and compare them before zeroing in on one bank. The difference can be as high as 100 basis points (or 1%). It doesn’t look big unless you factor in the effect of compounding.
For example, if you invest Rs. 1 lakh in a tax-saver FD which pays 8% interest for five years, your final value at the end of 5 years will be Rs. 1.48 lakh. If you do the same with another bank offering 7%, your final value will be 1.41 lakh. So, there is a difference of Rs. 7,000, i.e. you can get 7% more money on your investment! Here are tax saver FD rates of some of the banks.
|Name of the bank||Interest rate on tax saved FD|
|State Bank of India||6.85%|
|Bank of Baroda||6.7%|
Interest as on 9 Jan 2019. Data taken from respective bank’s website.
Note: For senior citizens, the interest rate is higher by 0.5%.
Important Points To Keep In Mind
FDs are very useful for financial planning. If you have a specific goal and a time horizon, you can easily calculate the sum to invest to achieve a particular goal. You should mention a nominee when investing in tax saver FDs. In case of your death, your nominee can claim the final amount. You can open tax saver FDs in your name or jointly. However, only one applicant can avail the tax benefit under 80C. The tenure of tax saver FDs can go up to 10 years. Ask your bank about the maximum tenure of the FD before investing in it. If you are a senior citizen investor, then interest income up to Rs. 50,000 in a financial year from bank FD/post office is tax-free.
The writer is CEO, BankBazaar.com