Tax-saving FD: Highest interest rate, tax benefits, premature withdrawal

A tax-saving fixed deposit can be an option if you haven’t made any tax-saving investments yet and are seeking a safe way to reduce your tax burden. Investments made through tax-saving FDs qualify for tax savings under section 80C of the Income Tax Act

Compared to equity-based tax savings options like ELSS plans, tax-saving FDs are safer because they are debt investments. A tax saving FD’s returns are also guaranteed by the lender (the bank or post office) and are set for the duration of the FD

Tax saving vs other tax saving options

This debt investment has the shortest lock-in term of 5 years and offers a monthly interest pay out option among debt investments that qualify for the section 80C tax benefit. While five-year NSCs are cumulative instruments and do not make periodic interest payments, they do offer the Section 80C tax benefit. As a result, tax-saving FDs are a comparably more liquid, secure, and convenient option among debt investments.

Banks offer tax saving FD
India Post also offers a tax saving option on its 5 year Post Office Time Deposit, at present it is offering an interest rate of 7% (for the Jan-Mar 2023 quarter). Big banks like SBI offer 6.50% interest rate for regular citizens, HDFC Bank and ICICI Bank offer interest rate at 7%. DCB Bank is offering the best rate of 7.60% on its tax saving FD and AU Small Finance Bank offers 7.20%.

Tax saving FD: Old vs New tax regime
If a person chooses the old tax regime, they will be able to claim a deduction for investments up to Rs 1.5 lakh made in a financial year by investing in tax-saving fixed deposits under Section 80C of the Income-tax Act (FDs). To determine the net taxable income, the amount so invested must be subtracted from the gross total income, according to current income tax regulations. Those who choose the new tax system are not eligible for this incentive.

Here are a few things to keep in mind when investing in a tax-saving FD:

• Individuals and HUFs are the only ones who can invest in the tax-saving fixed deposit (FD) plan. A minor can also invest with an adult.
• The FD can be opened with a minimum deposit amount that varies by bank. The maximum amount in a fiscal year is, of course, Rs 1.5 lakh, which is the limit for tax-saving investments under Section 80C of the Income Tax Act.
• These deposits have a 5-year lock-in term. Premature withdrawals and loans from these FDs are not permitted.
• Apart for co-operative and rural banks, these FDs can be purchased from any public or private sector bank.
• A 5-year investment in a Post Office Time Deposit qualifies for a deduction under section 80 (C) of the Income Tax Act of 1961.
• These FDs can be held in either a ‘Single’ or a ‘Joint’ mode. If the manner of holding is joint, the tax benefit is only available to the first holder.
• Senior citizens generally receive slightly higher interest rates on FDs from most institutions. With tax-saving FDs as well, there is a difference in interest rates.

Taxation
TDS is necessary since the interest collected is taxable depending on the investor’s tax bracket. Deposit interest is either paid monthly or quarterly, or it can be reinvested. By filing Form 15G to the bank (or Form 15H for elderly persons), one can avoid TDS on interest earned. If an individual receives more than Rs 40,000 in interest in a fiscal year, TDS will be required, but interest income taxation would remain the same. Section 80TTB allows senior citizens to deduct up to Rs 50,000 from the interest on deposits.