Tax-Saving FDs: 15 Things to Keep in Mind Before Investing

Fixed deposits (FDs) are offered for a short period of 7 days and also for long-term investments of up to 10 years. Tax-saving FDs have a tenure of at least 5 years. Under Section 80C of the Income Tax Act, 1961, investments made in tax-saving FDs up to ₹1.5 lakh can be claimed for income tax deductions.

In this article, we will talk about the things you must keep in mind before investing in tax-saving FDs. But first, let’s understand how a tax-saving FD works.

A 5-year tax-free fixed deposit will work in the same way as any other FD account. Here you invest a lump-sum amount for a fixed tenure of 5 years. This is among the safest investment options available as they are not affected by any unfavourable market conditions. Here your invested amount remains intact and earns a fixed interest. The tax-saving FD interest rates are more or less similar to the interest rates offered by other FDs. However, in tax-saving FDs, your invested amount is locked in for 5 years and you will not be able to make any premature withdrawals from such fixed deposits.

Now, let’s take a look at a few details that you must know before investing in tax-saving FDs.

1. Tax-saving fixed deposits are available only for individuals and Hindu Undivided Families (HUFs).

2. You must invest a minimum amount in a tax-saving FD. This amount will vary from bank to bank.

3. The tax-saving FDs have a lock-in period of 5 years.

4. These FDs offer a nomination facility.

5. You will not be allowed to make premature withdrawals from such fixed deposits.

6. You will not be allowed to avail loans or overdraft facilities from such fixed deposits.

7. Tax-saving FDs allow you to avail income tax deductions under Section 80C of the Income Tax Act, 1961. This deduction is allowed for an investment of up to ₹1.5 lakh.

8. The tax-saving FD interest rates are fixed on the date of creation of the FDs and will remain the same throughout the tenure of the FD. This rate will vary from bank to bank.

9. The interest on tax-saving FDs is payable on a monthly or quarterly basis.

10. You can also choose to reinvest the interest income into the fixed deposit.

11. The interest earned from the tax-saving fixed deposits is taxable as per your income tax bracket. They may also attract TDS under Section 194A of the Income Tax Act, 1961.

12. As per Section 80TTB of the Income Tax Act, Senior citizens can claim a tax deduction of up to ₹50,000 on the interest earned from tax-saving fixed deposits.

13. Tax-saving FDs can be opened in a single name or as a joint account.

14. If they are opened as a joint account, the tax benefits will be available only to the primary or first account holder.

15. Most banks offer higher tax-saving FD interest rates to senior citizens as compared to the interest rate offered to non-senior citizens for the same FD.

If you are considering investing in a tax-saving FD, you can now make this investment online using the net banking feature. However, before you make your investment, check the tax-saving FD interest rates offered by various banks and their features. This will help you make an informed decision.