5-Year Fixed Deposit Tax-Free: Know All About Tax-Saver FD
Updated: 16 hours ago
There are various types of fixed deposit accounts available to assist people and organisations in setting aside money for the future. You can select the tenure for general FD accounts as per your convenience. Many banks provide a five-year FD plan tailored to save taxes in along with the standard FD accounts. According to Section 80C of the Income Tax Act of 1961, investing in a five-year FD scheme entitles one to an income tax deduction. It's possible that the terms, features, and advantages of this kind of account differ slightly from those of regular FD accounts. To take advantage, there are several things you must understand regarding these FD accounts. In this article, we will discuss tax-saver FDs in detail.
Table of content
What is a Tax-Saving Fixed Deposit?
Section 80C of the Income Tax Act of 1961 provides a tax deduction for certain types of fixed deposit accounts, including tax-saving fixed deposit (FD) accounts. Any investor who funds a tax-saving fixed deposit account is eligible to receive a deduction of up to Rs. 1.5 lakh annually. Its characteristics include:
Five years of lock-in
Earned interest is subject to taxation.
Interest rates vary from 5.5% to 7.75%.
Similar to other standard FDs provided by different financial institutions, tax-saving FDs allow you to invest a lump sum money for a predetermined amount of time and receive a guaranteed return on your investment. The minimum lock-in duration for tax-saver FDs is five years, which is the only way they are different from regular FDs. This implies that your fixed deposit will only be available for withdrawal after five years. You receive the entire accrued corpus at maturity, along with a fixed return on your investment during these five years. You receive the corpus following the bank's TDS (tax deducted at source) deduction because interest received on these fixed deposits is taxable. In addition, you have the option to renew your fixed deposit if you choose not to close it at maturity.
Tax-Saving FD Rates
The following table represents the tax-saving FD interest rates offered by different banks for the year 2024.
Banks | FD Rate for General Public | FD Rate for Senior Citizens |
HDFC Bank | 7.00% | 7.50% |
IDBI Bank | 6.5% | 7% |
IndusInd Bank | 7.85% | 8.25% |
Federal Bank | 7.75% | 8.25% |
DCB Bank | 8% | 8.60% |
IDFC First Bank | 7.75% | 8.25% |
RBL Bank | 8% | 8.50% |
YES Bank | 7.75% | 8.25% |
Axis Bank | 7.10% | 7.75% |
State Bank of India | 7% | 7.50% |
Benefits of Tax-Saving FDs
For decades, people have trusted fixed deposit accounts more than any other financial tool when it comes to saving money. Here are the benefits that set tax-saving FDs apart.
Compared to savings accounts, FDs have a greater potential to generate interest.
You can make a one-time lump sum deposit with a tax-saving FD. It's a useful feature if you have a lot of extra money.
Five years is the minimum duration required to receive tax benefits. It can, however, be extended for a longer time period.
An FD that saves taxes is completely safe. Unlike mutual funds and other market-related investment options, interest rates are not impacted by market fluctuations. Until it matures, the tax-saving FD interest rates are likewise fixed.
FDs allow for deposit amount flexibility according to investor convenience.
Section 80C of the Income Tax Act of 1961 allows for income tax deductions of up to Rs. 1,50,000 annually.
Features of Tax-Saving FDs
Section 80C of the IT Act of 1961 allows you to receive an income tax exemption with a tax-saving FD. It is eligible for up to Rs 1.5 lakh in investment.
The lock-in period for a tax-saving fixed deposit is five years. Additionally, the interest rates don't alter during the course of the five years.
As a component of the Tax Saving FD, the interest earned is taxable and subject to source deduction.
Loan facilities against deposits are provided by a standard FD. However, a Tax Saving FD does not allow for early withdrawals, overdrafts (OD), or lending capabilities.
A Tax Savings Fixed Deposit does not have the option of auto-renewal.
Interest payments under a tax-saving FD can be made whenever it's convenient for you. You have the option to reinvest the principal amount or receive monthly or quarterly payouts.
Banks have different interest rates, as do rates for Indian citizens and Hindu Undivided Families (HUF). There are two ways to hold a Tax Saving FD: individually and jointly. Only the first account holder is eligible for tax benefits if it's a joint Tax Saving Fixed Deposit.
Eligibility to Invest in Tax-Saving Fixed Deposits
Hindu Undivided Families (HUFs) and individuals can invest in a tax-saving FD.
Except for cooperative and rural banks, you can invest in tax-saving FDs through any public or private bank.
A person may own "single" or "joint" tax-saving investments. Only the first holder is eligible for tax benefits in the "Joint" arrangement.
A five-year time deposit at the post office is considered a tax-saving FD.
Tax Deduction on Regular Fixed Deposits
For a Regular Fixed Deposit, the following will apply.
Interest due or reinvested on RD and FD per customer across all branches that exceeds Rs. 40,000 (Rs. 50,000 for senior persons) in a fiscal year will result in TDS being deducted.
Following the conclusion of each quarter throughout the fiscal year, you will receive a TDS Certificate by mail that includes the specifics of the TDS that was withheld during that quarter.
TDS on Tax-Saving FDs
Tax-saving fixed deposits pay interest either monthly or quarterly. Another option is to reinvest it. The interest earned in this way is subject to taxation based on the income tax bracket that corresponds to your taxable income. You can avoid paying the TDS by providing the bank with Form 15G. Form 15H can be turned in to the bank by older people. TDS is applicable to persons whose total interest earned over a fiscal year exceeds ₹10,000. Section 80TTB of the Income Tax Act allows seniors to deduct up to ₹50,000.
Who Should Consider Investing in Tax-Saving FDs?
A safe investment choice for anyone who meets the following criteria is a tax-saving fixed deposit.
Tax Savings: Tax savings Section 80C permits the tax deduction of fixed deposits. It is therefore perfect for investors who want to save as much money on taxes as possible while yet getting steady profits.
Guaranteed Return: Fixed deposits protect your money from market fluctuations by providing fixed returns. For investors hoping to generate set returns on their investments, it therefore offers a safe path.
Investors who are risk averse: Since there is no risk involved, tax-saving FDs may be a good choice for you if you don't want to take on any market risk.
How to Open a Tax-Saving FD
The bank requires your Aadhaar card, PAN card, proof of address, and photos in order to open a tax-saving fixed deposit. Go to the branch of your choice and complete the FD application. Choose the kind of tax-saving FD and indicate the amount you want to deposit. If more KYC documentation is needed for verification, provide it. An FD receipt with the terms will be sent to you after processing. As required by your financial planning, keep track of the withdrawal or renewal options' maturity dates.
Conclusion
With a five-year lock-in term, a tax-saving fixed deposit provides tax benefits under Section 80C, allowing for a deduction of up to Rs. 1.5 lakh. The capital lowers taxable income, making it a preferred tax-saving choice even though the interest is taxable. If you want to take advantage of tax benefits and boost your savings, a five-year fixed deposit is the best option for you.
FAQ
Q1. Are tax-saving FDs risky?
Fixed savings that save taxes are risk-free. The returns are guaranteed, and the amount you deposit is fully safeguarded.
Q2. Who should invest in a tax-saving FD?
Tax-saving fixed deposits are a good option for people seeking a guaranteed return with a shorter lock-in period and a tax-saving alternative.
Q3. How can I open a tax-saving FD?
Investing in a tax-saving fixed deposit is straightforward. An account can be opened at a bank branch or online. It is advisable to examine interest rates offered by several banks on tax-saving FDs prior to making an investment.
Q4. What should investors understand about the tax-saving FD interest rates?
Over the course of their five-year term, the interest rate on tax-saving fixed deposits stays constant. Interest rates for HUFs, NRIs, and Indian nationals differ from bank to bank and are frequently adjusted. Higher interest rates are available to bank employees and senior persons. The interest must be included in your income, is taxed, and is subtracted at the source.
Q5. What is the tax-saving FD investment limit?
A tax-saving fixed deposit has a minimum investment limit of Rs 100 while a maximum investment of Rs 1.5 lakh is applicable for every fiscal year.
Q6 What is the tenure of a tax-saving FD?
The lock-in period for tax-saving fixed deposits is five years. There are no overdraft facilities, loans, or early withdrawals permitted against tax-saving FDs.
Q7. What are the tax benefits of these FDs for joint holders?
A maximum of Rs 1.5 lakh in income tax deductions is available to individual account holders each fiscal year. Only the account's primary holder is eligible for this tax benefit in the case of joint holders. This advantage is not available to the other account holders.
Q8. Who can invest in tax-saving FDs?
NRIs, HUFs, senior persons, and resident Indians can all invest in tax-saving fixed deposits.
Q9. What happens once a tax-saving FD matures?
The maturity money will be moved to your savings bank account linked to the fixed deposit account at the conclusion of the period.
Q10. Is the interest income on tax-saver FDs free from taxation?
No. Individuals are solely liable for interest paid or accrued on tax-saver FDs. It is included in your income and is subject to the tax rates that are applicable to your income bracket. The bank deducts 10% TDS on interest payments if they total more than Rs. 10,000 for all bank accounts in a given fiscal year. The tax deduction rate rises to 20% if the person does not present a PAN card.
Q11. What are tax-saver FD rates in HDFC?
For normal residents, HDFC Bank offers a five-year Tax Saver FD Scheme with an interest rate of 7.00% p.a., and for senior citizens, 7.50% p.a.
Q12. Are all 5-year fixed deposits tax-free?
No, only those listed under Section 80C of the Income Tax Act are eligible for tax deductions on investments.
Q13. Is the interest earned on a 5-year FD tax-free?
No, the interest earned is taxable, even though the principal amount qualifies for deductions under Section 80C.
Q14. What is the maximum tax-saving limit for 5-year FDs?
You can claim a tax deduction of up to ₹1.5 lakh under Section 80C for investments in tax-saving FDs.
Q15. Can NRIs invest in tax-saving FDs?
No, tax-saving FDs under Section 80C are not available for Non-Resident Indians (NRIs).
Q16. Can I break a 5-year tax-saving FD prematurely?
No, these FDs come with a lock-in period of 5 years and cannot be withdrawn prematurely.
Q17. Do banks offer different interest rates on tax-saving FDs?
Yes, interest rates vary across banks and are usually higher for senior citizens.
Q18. Is the investment amount eligible for tax exemption every year?
No, the tax deduction is claimed only in the year of investment. Subsequent years do not qualify.
Q19. Can I take a loan against a 5-year tax-saving FD?
No, loans or overdrafts are not allowed against tax-saving fixed deposits.
Q20. What documents are required to open a 5-year FD?
Basic KYC documents like PAN, Aadhaar, and proof of address are needed to open a fixed deposit account.
Q21. Can I open a tax-saving FD jointly?
Yes, but only the first account holder can claim the tax benefits under Section 80C.
Q22. Are there risks associated with tax-saving FDs?
Tax-saving FDs are low-risk investments as they are backed by banks, ensuring safety of principal and interest.
Q23. What happens if I do not declare my FD interest in my ITR?
Failing to declare interest income may lead to penalties during tax assessments.
Q24. Can senior citizens claim additional benefits on tax-saving FDs?
Yes, senior citizens generally receive higher interest rates and can also benefit from Section 80TTB deductions.
Q25. How are tax-saving FDs different from other investments under Section 80C?
Unlike ELSS or PPF, tax-saving FDs offer fixed returns but do not offer exemptions on interest income.
Q26. What happens when a tax-saving FD matures?
Upon maturity, the principal and accumulated interest are credited to your account, but interest is taxable as per your income slab.
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