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Tax-Saving FD for Section 80C Deductions

Updated on :  

08 min read.

A fixed deposit account comes in numerous forms to help individuals and entities to save funds for their future. The general FD accounts allow you to choose the tenure of the account based on your convenience. In addition to the general FD accounts, many banks offer a five-year FD scheme that is meant for tax saving. 

One can claim an income tax deduction by investing money in a five-year FD scheme under Section 80C of the Income Tax Act, 1961. The features, benefits, and terms associated with this type of account may not be completely the same as the normal FD accounts. There are a number of things you need to know about such FD accounts to make use of the benefit. 

Here’s everything you need to know.

Latest Update

RBI has announced a new rule applicable to unclaimed, matured FD accounts. That is the funds in an unclaimed, matured FD account will attract an interest rate as applicable to the savings account or the contracted rate of the matured FD, whichever is lower.

What is a Tax-Saving FD

A tax-saving fixed deposit (FD) account is a type of fixed deposit account that offers a tax deduction under Section 80C of the Income Tax Act, 1961. Any investor can claim a deduction of a maximum of Rs.1.5 lakh per annum by investing in a tax-saving fixed deposit account. Some of its features are:

  • A lock-in period of 5 years
  • Interest earned is taxable
  • The rate of interest ranges from 5.5% – 7.75%

Benefits of Tax-Saving Fixed Deposits

A fixed deposit account is a financial tool that has enjoyed the iron-clad trust of the general population over the decades when it comes to savings. Since it is a bank-based investment product closely monitored by the RBI, investors are assured of its safe and low-risk nature. The money deposited is also easily redeemable with interest upon maturity. Some of the benefits of FDs are:

  • FDs have a higher interest-earning potential than savings accounts.
  • FDs allow only a one-time lump sum deposit.
  • Interest earned on fixed deposits is subject to TDS.
  • Minimum tenure for receiving tax benefits is five years. However, it can be extended for a longer tenure.
  • FDs offer flexibility in the deposit amount based on the investor’s convenience.
  • Investors can get income tax deductions up to Rs.1,50,000 per annum under Section 80C of the Income Tax Act, 1961.
  • Premature withdrawal may not be available.

Comparison With Other Tax-Saving Investments

Besides FD, there are many other tax-saving investment options that help you build your wealth, such as ELSS tax-saving mutual funds, PPF, and NSC. Fixed deposits are deemed as one of the safest savings options out there that offers capital protection and growth without falling victim to market highs and lows. However, the returns from this scheme are taxed.

This is where ELSS stands out with its dual-benefit—its returns are generally higher and tax-free. This, coupled with a mere lock-in period of 3 years, is all the more reason for you to invest in ELSS now.

Investment TypeReturnsLock-in PeriodTax on Returns
5-Year Bank Fixed Deposit5% to 7%5 yearsYes
Public Provident Fund (PPF)7% to 8%15 yearsNo
National Savings Certificate (NSC)6% to 8%5 yearsYes
National Pension System (NPS)8% to 10%Till RetirementPartially Taxable
ELSS Funds12% to 15%3 yearsPartially Taxable

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Frequently Asked Questions

Who should invest in a tax-saving FD?

Anyone looking for a shorter lock-in period and seeking a guaranteed return with a tax-saving option should invest in tax-saving fixed deposits.

How can I open a tax-saving FD?

Investing in a tax-saving fixed deposit is very easy. You can open an account online or at a bank branch. Different banks offer different interest rates on tax-saving FDs, so it is best to compare rates before you make an investment.

Are tax-saving FDs risky?

Tax-saving fixed deposits are risk-free. The amount you invest in it is completely protected, and the returns are also guaranteed.

What should I know about the tax-saving FD interest rates?

Tax-saving fixed deposits have a fixed interest rate that remains the same throughout the 5-year tenure. The interest rates for Indian citizens, HUFs and NRIs vary from bank to bank and get updated very often. Senior citizens and bank staff members are offered higher interest rates. The interest is taxable, deducted at source, and is to be added to your income.

What is the tax-saving FD investment limit?

The minimum investment that can be made in a tax-saving fixed deposit is Rs 100, whereas the maximum limit is Rs 1.5 lakh per financial year.

What are the tax benefits of these FDs in the case of joint holders?

Individual account holders can get an income tax deduction for a maximum amount of Rs 1.5 lakh per financial year. In the case of joint holders, this tax benefit is available only to the first holder of the account. The other account holders cannot claim this benefit.

What is the tenure of a tax-saving FD?

Tax-saving fixed deposits have a lock-in period of 5 years. No premature withdrawals, loans, or overdraft facilities are available against tax-saving FDs.

Who can invest in tax-saving FDs?

Resident Indian citizens, senior citizens, HUFs, and NRIs can invest in tax-saving fixed deposits.

What happens upon the maturity of a tax-saving FD?

When the fixed deposit term ends, the maturity amount will be transferred to your savings bank account associated with the FD account.

Anything else I should know?

Tax-saving fixed deposits offer a nomination facility. A tax-saving FD can be transferred from one bank branch to another.

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