A tax saver fixed deposit, unlike mutual funds, does not have market-linked returns. They have a set interest rate and guaranteed returns for the duration of the loan. Interest from FDs can serve as a regular source of income for senior citizens, in addition to saving them money on taxes. Here’s all you need to know about using a bank to invest in tax-advantaged FDs.
Who is eligible to invest?
Individuals and Hindu Undivided Families (HUFs) are the only ones who can invest in tax-saving FDs under existing tax laws. You can start a tax-saving FD account with any bank, including one with which you already have a savings account, as long as the bank allows you to do so without first opening a savings account.
You can also open tax saving FD without having an account with the bank, but you’ll have to go through a Know-Your-Customer (KYC) procedure. Self-attested copies of your ID proof (PAN), address proof (Passport, Driving License, etc.) and passport size pictures will be required to complete the KYC procedure.
|Bank Name||Tax Saving||Qly Compound Return|
|IDFC First Bank||6.25||13635.39|
|Karur Vysya Bank||5.90||13402.36|
Payments of interest
The interest rate on these FDs vary depending on the bank. Tax-saving FDs come in both cumulative and non-cumulative interest choices, which are typically offered by most banks.
Interest earned on your principal will be re-invested and paid to you at maturity if you choose the cumulative option. If you choose the non-cumulative option, interest will be paid to you on a monthly, quarterly, half-yearly, or annual basis, depending on the bank’s terms.
On tax-saving FDs, senior citizens are usually offered a higher interest rate.
Minimums and maximums investment in FD
The minimum amount required to open a tax-saving FD differs per bank. These deposits, however, cannot be used to invest more than Rs 1.5 lakh in a single financial year.
Tenure of FD
The term of tax-savings fixed deposits (FDs) is fixed at five years.
According to the Bank Term Deposit Scheme of 2006, you can’t get out of these FDs until they’ve been open for five years. Unlike regular FDs, which can be used as collateral or pledged to acquire loans, tax-saving FDs cannot be utilised as collateral or pledged.
Section 80C of the Income Tax Act allows for a deduction of up to Rs 1.5 lakh in a single financial year. It’s important to remember, however, that interest paid or accrued on the principal is fully taxable in your hands. Interest will be applied to your earnings and taxed at the rates that apply to your income bracket.
TDS will be deducted by the bank if interest payments on FDs with a single bank reach Rs 10,000 in a financial year.
Type of FD
Individually or jointly, you can invest in a tax-saving FD. If the mode of holding is joint, however, the deduction under section 80C is only available to the first holder listed on the FD receipt.
Important FAQs on tax saving FDs as per HDFC Bank website
1. How much tax can I save with a tax-ssaving FD?
The amount of tax you can save will depend on the tax bracket you are in and the sum you invest in the FD. If you are in the highest tax-bracket (of 30%) and put Rs 1.5 lakh in the tax-saving FD, you can save up to Rs 46350 (Rs 45,000 in tax, plus Rs 1350 in cess).
2.How much can I invest in the five-year tax-saving FD?
You can invest anywhere between Rs 100 and Rs 1.5 lakh in a financial year in the Fixed Deposit.
3. What is the tenure of this FD?
The tenure of the FD is five years. But unlike regular FDs, you cannot prematurely withdraw or liquidate these FDs. The FD has a five-year lock-in.
4. Is this interest taxable?
Yes, the interest is taxable in line with your tax slab. Besides, the bank will deduct TDS at 10% if your interest income across all deposits and branches exceeds Rs 10,000 in a FY. If you haven’t submitted your PAN, the bank will deduct TDS at 20%