Tax Saving Fixed Deposit
The Tax Saving Fixed Deposit gives you
fixed return as well as benefit of tax savings. It is one of the 5 most
popular tax saving options. The other four are NSC, PPF, ELSS and Term
Insurance. Among the 5 most popular tax saving methods, the tax saving
FD scores on many fronts. However, It has some shortcomings as well. You
must know the feature and taxability of tax saving fixed deposit before
investing.
Features Of Tax Saving Fixed Deposit
Easy To Open An Account
- You can open a tax saving fixed deposit in a government or private banks. Most of the bank branches gives this facility. The cooperative banks can’t open a tax saving FD.
- HUF can also open a tax saving fixed deposit account. You can open a tax saving account jointly as well.
- The tax saving FD account can be transferred from one branch to another branch of the bank. Contents
Fixed Return
- The tax saving Fixed deposit gives you a fixed interest rate. The rate does not change during the deposit period.
- The interest rate on tax saving FD is decided by the banks. The rate of interest is applicable as per prevailing 5 yr deposit rate.
- Senior citizens get a higher interest rate.
Money Gets Locked
You can’t withdraw tax saving FD before the maturity. The maturity duration is minimum 5 years.No Loan Facility
Unlike other fixed deposits, the tax saving FD receipt cannot be pledged for a loan.Limit of Investment
You can invest minimum Rs 100 in a tax saving FD account. The maximum you can invest is Rs 1.5 lakh in a year.Tax Rebate to Tax Saving FD
- The invested amount of tax saving Fixed deposit is eligible for the tax deduction under section 80C.
- The interest earned from the tax saving FD is taxable. The interest would be added in your taxable income for the calculation of tax.
- In a joint tax saving FD account, the tax benefit is available only to the first account holder.
TDS is Deducted From the Interest Part
- The tax on interest part is deducted at source every year. Like any other FD, the bank will deduct TDS at the end of every financial year.
- If you have given the PAN, the TDS would be at the rate of 10% else it would be 20%.
- If your total income is below the tax free limit, or you think that bank has deducted excess TDS, you can get a refund by filing income tax return.
- You can also avoid the TDS by submitting the form 15H/15G to the bank at the beginning of every financial year.
- The bank gives the Form 16A as the certificate of TDS deduction. This form can be used to claim income tax refund.
Why Should I Invest in Tax Saving Fixed Deposit
Tax saving fixed Deposit is the easiest tax saving method. Except cooperative and rural banks almost all the banks open tax saving FD. Some banks give high interest rate on tax saving FD. The return in tax saving FD may be greater than any other fixed return tax saving investments. Senior citizens get a higher interest rate on tax saving FD. Among all the fixed return tax saving investments, tax saving FD has a minimum lock in period. If your total income plus interest of FD is below the tax-free limit, you need not to pay any tax.The Negative Points of Tax Saving FD
The ‘ease’ is the best thing of the fixed deposit. But it has some shortcomings as well.- The biggest negative point is the tax on interest. There are other tax saving investments which are not taxable at any point.
- Another negative thing is the Tax deduction at source. If you forget to fill the form 15G/15H, the bank will deduct the tax itself. It is a hassle for you. As you would be required to wait for the income tax refund. For the people in higher tax slab, tax on interest may be 20% or 30%.
- The lock in period of tax saving FD is 5 years, which is greater than ELSS lock in period
Other Options of Tax saving
Besides tax saving fixed deposit there are many other options to save tax. Among them some tax saving options give you fixed return like this scheme.Comparable Tax Saving Methods
Public Provident FundNational Savings Certificate
It also gives a fixed return. It comes in two duration the five years and 10 year. Like tax saving FD the interest is taxable.
Senior Citizen Saving Scheme
It is a small saving scheme which is available at the post and the scheduled banks. The interest rate is slightly higher than NSC. The scheme is for the senior citizens only
Evaluation Of Tax Saving Fixed Deposit
Tax Saving FD Vs PPF
Often people confuse between the PPF and tax saving FD. Which one is most beneficial? The selection of tax saving FD or PPF, depends upon your requirement.The PPF comes under the EEE (exempt, exempt, exempt) regime i. e. There would not be a tax at any point, be it an investment, return or maturity. While tax saving FD comes under EET (exempt, exempt, Taxed) regime. The tax is levied on return. While both of these investments give a similar interest return. The PPF gives you better effective return because of the complete tax rebate.
This extra benefit of PPF comes with higher lock in period. In the PPF money is locked for 15 years. It is 3 times longer than tax saving FD. However, you get the loan and partial withdrawal facility with the PPF.
| Tax Saving FD | PPF | |
| Lock In | 5 years | 15 years |
| Return | Depends upon Bank | Depends Upon 10 year government bond yield. Changes Every year |
| Tax on Return | Taxable | Not Taxable |
| Max. Investment | 1.5 lakh/year | 1.5 lakh/year |
| Ease | Very easy | Easy |
| Loan | No | After 3 years |
| Premature Withdrawal | No | After 6 years |
| Available in | Bank & post office | Bank & post office |
Tax Saving FD Vs NSC
Like A PPF account the National Saving Certificate is also a small saving scheme of government. It also has a lock in period of 5 years. Like tax saving FD, the interest part of NSC is also taxable. The rate of interest is fixed on the basis of 10 years government bond yield. But NSC is available only at the post office.| Tax Saving FD | NSC | |
| Lock In | 5 years | 5 & 10 years |
| Return | Depends upon Bank | Depends Upon 10 year government bond yield. |
| Max. Investment | 1.5 Lakh/year | No Limit |
| Tax on Return | Taxable | Taxable |
| Ease | Very easy | Very easy |
| Loan | No | Loan on NSC mortgage |
| Availability | Bank & post office | Post Office |
| Premature Withdrawal | No | No |
Tax Saving FD Vs Senior Citizen Saving Scheme
The senior citizen saving scheme is a government scheme. You can deposit money in this scheme at the post office as well as at the bank. But this scheme is only for the senior citizens while there are no such restrictions for tax saving FD. Like SCSS the tax saving FD also gives the higher return to the senior citizens. Tax saving FD gives interest with the maturity amount, but the SCSS gives regular interest.| Tax Saving FD | SCSS | |
| Lock In | 5 years | 5 years can be extended for 3 years |
| Return | Depends upon Bank | Depends Upon 10 year government bond yield. |
| Max. Investment | 1.5 Lakh/year | 15 Lakh |
| Tax on Return | Taxable | Taxable |
| Ease | Very easy | Easy |
| Loan | No | No |
| Availability | Bank & post office | Bank & post office |
| Premature Withdrawal | No | After one year with penalty |
Tax Saving Fixed Deposit Vs Tax Free Bond
The Tax free bonds and tax saving fixed deposit gives you fixed return. Both of these investment saves your tax. But they have some different approach. While you can claim tax deduction of tax saving FD under section 80C, the tax free bond does not give any tax rebate at the time of investment. The tax free bonds come under TEE regime. The interest earned from tax free bonds is tax free. You need not to give any tax at the time of maturity. On the other hand the interest of tax saving FD is taxable.Another big difference between them is the tenure. The tax free bonds are issued for more than 10 years. You can’t redeem these bonds before the maturity date. Tax saving FD has a shorter lock in period of 5 years. However, you can sell tax free bond in the secondary market, which is not possible with tax saving FD.
You can open tax saving FD any time. But for a tax free bond you have to wait for the bond issue.
| Tax Saving FD | Tax Free Bond | |
| Lock In | 5 years | More than 10 years |
| Return | Market Rate | Slightly less than market rate |
| Max. Investment | 1.5 Lakh/year | 5 lakh |
| Tax on Return | Taxable | Exempted |
| 80C tax deduction | Available | Not Available |
| Premature Withdrawal | Not Possible | Can sell bond in the secondary market |
Effective Annualized Interest Rate
The tax saving FD gives the normal FD rate with tax saving. The tax saving is significant, therefore your effective earning on tax saving FD is far ahead. Let us see the calculation of Rs 10,000 investment in 5 year tax saving fixed deposit.| Tax Slabs | ||||
| 10% | 20% | 30% | ||
| A | Invested Amount | 10,000 | 10,000 | 10,000 |
| B | Tax saving | 1,030 | 2,060 | 3,090 |
| C | Effective Investment (A-B) | 8970 | 7,940 | 6,910 |
| D | Maturity Amount
(Assuming interest rate 9%) A*(1+9/100)^5 |
15,386 | 15,386 | 15,386 |
| E | Total Benefit (D-A) | 6,416 | 7,446 | 8,476 |
| F | Effective Interest Rate = (D/C)1/5 -1 | 11.40% | 14.15% | 17.36% |