Investors with a low risk appetite and a low tax bracket can earn fair returns by investing in five-year tax-saving fixed deposits (FDs). They can take advantage of the section 80C tax exemption by investing in these FDs. Section 80C of the Income Tax Act allows for tax deductions on investments up to Rs 1.5 lakh. Premature exits are not permitted from tax-saving FDs, which have a five-year lock-in duration. Despite the fact that bank FD rates have sunk to historically low levels, some banks still bid attractive interest rates which we have listed below.
10 things to know about tax saving FDs
According to current income tax statutes, you can claim up to Rs 1.5 lakh in tax-saving fixed deposits under Section 80C of the Income Tax Act. Below are some lesser known facts of tax saving FDs that you need to know:
- Individuals and HUFs are the only ones that can invest in a tax-saving deposit scheme.
- A minimum deposit is required to open a tax-saving FD scheme, which varies from one bank to the next.
- Tax-saving fixed deposit schemes come with a lock-in period of 5 years with no premature withdrawal and loan against deposit facility.
- Apart from co-operative and rural banks, one can invest in these FDs across either public or private sector banks.
- A five-year deposit in a Post Office Time Deposit is also eligible for a deduction under section 80 (C) of the Income Tax Act of 1961.
- Along with the tax benefits a five-year post office time deposit scheme can be transferred from one post office to another and one individual to another.
- These FDs can be maintained in either a 'Single' or a 'Joint' type. The tax advantage is only applicable to the first holder if the form of ownership is joint.
- TDS is due because the interest received is taxable according to the investor's slab rate. Deposit interest is paid either monthly or quarterly, or it may be reinvested. By submitting Form 15G (or Form 15H for senior citizens) to the bank, an individual can prevent TDS on interest received.
- Tax-saving deposits also come with a nomination facility.
- On tax-saving FDs senior citizens marginally get higher rates opposed to the general public.
TDS applicable on FD
TDS is a tax that is automatically deducted from your fixed deposit by the bank where you have an account. The bank only deducts TDS if your fixed deposit returns surpass Rs 40,000 (Rs 50,000 for senior citizens) per year. If your fixed deposit earnings surpass Rs 40,000 (or Rs 50,000 by elderly people) and you furnish the bank with your PAN, the bank may subtract 10% TDS from your interest income. If you do not submit your PAN to the bank, the bank will deduct 20% from your fixed deposit income as TDS. To prevent the inconvenience of additional TDS deduction and resulting refund from the Income Tax Department, Form 15G (for non-senior citizens) and 15H (for senior citizens) can preferably be submitted at the beginning of each fiscal year. Surprisingly, no TDS is withheld from fixed or recurring deposits made at the post office.
Tax Saving FD Rates
In the below table DCB Bank and Yes Bank are at the top of the list with 6.75 per cent interest, after IndusInd Bank with 6.50 per cent interest on five-year tax-saving FDs. On tax-saving FDs, small private banks bid interest rates as high as 6.75 per cent. These tax-saving FD rates are higher than those offered by major public sector banks. On tax-saving FDs, AU Small Finance Bank and Ujjivan Small Finance Bank bid 6.50 per cent and 5.55 per cent interest, respectively. In comparison to major private banks, small finance banks bid higher rates. Axis Bank, ICICI Bank, and HDFC Bank, for example, provide 5.50 per cent, 5.35 per cent, and 5.30 per cent interest on tax-saving FDs. Union Bank of India provides the highest interest rate on a 5-year tax-saving FD at 5.55 per cent, led by Canara Bank and State Bank of India (SBI) at 5.50 per cent and 5.40 per cent respectively.
|Private Sector Banks||ROI per annum for the general public||ROI for senior citizens|
|City Union Bank||6%||6%|
|Public Sector Banks||ROI per annum for the general public||ROI for senior citizens|
|Bank of India||5.30%||5.80%|
|Punjab National Bank||5.30%||5.80%|
On her Union Budget 2020, finance Minister Nirmala Sitharaman raised deposit insurance cover from Rs. 1 lakh to Rs. 5 lakh for bank customers. The Reserve Bank of India's Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly-owned division. Customers' deposits in a bank are covered by deposit insurance provided by DICGC. In a scheduled bank, whether commercial or small finance, you are covered for both principal and interest up to Rs 5 lakh respectively.