Tax Savings FD Schemes

A tax-saving Fixed Deposit is just a financial investment vehicle provided by banks and NBFCs that allows you to deposit cash and earn a greater rate of interest over a standard savings account. Income Tax Act Section 80C exempts your investments in this programme from tax benefits*. A standard Fixed Deposit may provide better yields, but it does not provide tax advantages.

Let us learn everything regarding tax-saving fixed deposits in this post, covering its advantages and benefits, plus everything you need to understand in order to invest in it.

What exactly is a tax saving^* FD?

A tax saving Fixed Deposits is a form of deposit account that allows a person to receive a tax reduction* under Income Tax Act Section 80C. These fixed deposit accounts can be conducted in two ways: single-holder type accounts and joint-holder type accounts. Banks and post offices offer these tax-saving fixed deposits for you to opt for.

The tax advantage^* is only accessible to the initial holder if you choose a joint method of holding. These tax-saving fixed deposits have a 5-year maturity term. Individuals, as well as Hindu Undivided Families (HUFs), can claim a deduction under Income Tax Act Section 80C.

How do tax-saving fixed deposits work?

A fixed deposit is offered by both banks and non-bank financial companies. It is an account where you deposit a big sum of cash for a certain length of time. The deposit account has a 5-year maturity period. It provides a tax break* under Income Tax Act Section 80C. It features a lock-in term, which implies you cannot withdraw early. The interest gained on the deposits is taxed. When a tax-saving* Fixed Deposit matures, the maturity sum is transferred to the account holder's savings account that is linked with that Fixed Deposit account or from the account from where the initial payment was made.

What are the Key Features of Tax Saving FDs?

Fixed Deposit is among the most common investment routes for beginners in the nation. By investing in a tax-free FD, you can accumulate sufficient cash over a period. It not only provides high yields but also provides tax advantages. Here are some of the major characteristics of a tax-saving Fixed Deposit:

• Exemption from tax*:
  1. With a tax-saving Fixed Deposit account, you can get income tax relief under Section 80C of the Income Tax Act of 1961. It is available for investments of up to INR 1.5 lakhs.


• Term of agreement:
  Tax-saving fixed deposit accounts have a 5-year lock-in term. Rates of interest have also remained steady over the last five years.


• Interest is taxable:
  The amount of interest generated on the Tax Saving Fixed Deposit is taxable and must be deducted at its source. However, if you submit Form 15G, then there would be no TDS deduction by the bank, but you need to pay your due taxes on time.


• Early withdrawals are not allowed:
  A typical FD provides borrowing facilities in exchange for deposits as well as allows premature withdrawal at a cost. However, in the case of tax-saving fixed deposits, premature withdrawals, OD or overdraft, or loan options, on the other hand, are not accessible.


• No option for auto-renewal³:
  Tax Saving Fixed Deposit accounts do not have an auto-renewal feature.


• Variable interest payments:
  A tax-saving Fixed Deposit allows you to get interest payments whenever it is convenient for you. You can pick between quarterly or monthly payments or reinvest the principal balance.


• Additional features::
  The rates of interest vary per bank, as do the ongoing rates for Indian residents as well as HUF or Hindu Undivided Families. A Tax Saving Fixed Deposit can be kept in either a single or joint account. It can be in either or survivor mode. It is important to add the nominee's name at the time of opening your tax-saving bank fixed deposit.

  Tax advantages are only accessible to the initial account holder in the case of a joint Fixed Deposit account.

What are the Benefits of Tax Saving FDs?

If you have a basic fixed deposit account, you can choose the 5-year tax saving fixed deposit and qualify for tax deductions under Income Tax Act Section 80C. When we capitalise on this tax saver fixed deposit factor, the main advantage it provides is that it isn't market-linked. Although the lock-in term for Equity Linked Savings Scheme or ELSS policies is shorter at 3 years, the minimal investment is INR 500. Furthermore, because it is market-linked, the ELSS policies carry some risk. On the opposite side, Tax Saving Fixed Deposit requires a minimum deposit of INR 100. Although you may start a PPF bank account with as little as INR 100, the minimal deposit is INR 500. In addition, a PPF has a 15-year lock-in term, while these tax-saving accounts have a 5-year term.

The following are some of the primary benefits given by this system: -

• High Profits
  Tax-saving fixed deposits can generate more interest than regular savings accounts.


• One-Time Payment
  You can submit a one-time lumpsum investment into a tax-saving Fixed Deposit. It is a useful option to have if you get a big bonus or want to invest your surplus of savings.


• Lock-in Period
  The minimum period of eligibility for tax advantages is 5 years. It can, nevertheless, be prolonged for a longer period of time. This helps you practice disciplined investment. 


• Secure investments
  A tax-saving Fixed Deposit is completely safe. There are zero market swings influencing rates of interest, such as there are with Mutual Funds or similar market-related investing alternatives. The tax-saving Fixed Deposit interest rates are likewise set till maturity.


• Deposit amount flexibility
  Fixed Deposits provide for deposit amount adjustability depending on the accountholder's convenience.


• Tax Advantages*
  Section 80C of the 1961 Income Tax Act allows for income tax breaks of up to a limit of INR 1,50,000 per year.

Tax Savings FDs - Eligibility:

If you find yourself applicable for any of the following pointers, you will be eligible for tax-saving fixed deposits:

• Indian residents


• Hindu undivided families or HUF


• Individuals


• Minors who invest jointly with a legal adult


• Single and joint account holders can opt for tax-saving fixed deposits.

Tax Savings FDs – Documents Required:

Here are the documents required to create a tax-saving fixed deposit account:

1. Any government-authorised identity proof
2. Driver’s license
3. Ration card
4. Any government-authorised address proof
5. Aadhaar card
6. Passport
7. Voter’s card
8. Age-proof for senior citizens
9. 2 recent passport-size colour photographs.

The Bottom Line

All in all, investing in a tax-saving Fixed Deposit is the simplest means to save money and provides you peace of mind in knowing that your funds are guaranteed#. Considering the guaranteed return# on investment provided combined with the immunity from taxation* within each year, this is an ideal plan for those looking to grow their savings while ensuring that they also keep their taxes* in check.