What is a Tax Saver Fixed Deposit and Why Do You Choose It?

Apr 26, 2022

Tax saver FD: Your Friendly Tax-Saving Investment Option

The tax-savings benefits of fixed deposits (FDs) are one of the most widely touted benefits associated with them. However, the reality is not that simple. Not all FDs serve the same purpose. 

The differences between FDs aren’t just limited to the kind of interest rate an investor can expect. Only selected FDs, known as tax-saver FDs will help you save tax with your investment. 

At LenDenClub, we are to helping you make profitable investments, and we understand that profitable investments are only possible with accurate information. To that end, we have created this page dedicated to helping the LenDenClub audience understand these FDs properly.

 

What is a Tax-Saving FD? – An Insight

 

As mentioned above, special FDs, called tax-saving FDs, have the provision to help investors save taxes under Section 80C of the Income Tax Act of 1961.

According to this, investors can save up to a maximum of ₹1.5 lakh every year in the form of tax deductions by investing in a tax-saver fixed deposit.

There are a number of benefits associated with tax-saver FDs. Let’s find out more about them.

 

Tax-saver fixed deposit: Key Benefits You Must Know

 

The most obvious benefit of a tax-saving FD is the tax-saving part. However, there are other noteworthy benefits associated with them:

  • Tax-saver FD interest rates are more or less similar to regular FD rates offered by banks. Meaning, from an investor’s point of view, you get similar returns as regular FDs, with the additional tax-saving benefits
  • Most banks also offer an additional 0.5% interest rate to senior citizens who choose their tax-saver FDs
  • Most tax-saver FDs offer the ability to open a joint account. However, it is worth noting that even with a joint account, only one of the two people holding the account can avail of tax benefits

 

What Makes tax-saver FD Better than ELSS and PPF

 

The Section 80C of the Income Tax Act of 1961 doesn’t just favour FDs. According to the act, there are two other tax-saving options that qualify under section 80C- ELSS and PPF.

Equity-linked savings scheme or ELSS is a tax-saving investment scheme. These may seem like a more attractive option than tax-saving FDs to some investors as the lock-in period of ELSS schemes is less than tax-saver FDs. While FDs have a minimum lock-in period of 5 years, the lock-in period for ELSS is only 3 years.

However, this doesn’t necessarily mean that ELSS is a better investment option. If you pay attention to the name, it becomes apparent that ELSS is market-linked. Therefor, the returns, unlike FD interest rates, can vary drastically.

The other tax-saving option that investors have is called the Public Provident Fund or PPF. Unlike ELSS, PPF is not market-linked and is a relatively safer form of investment. However, PPF has an unusually long lock-in period that many investors find repulsive. The minimum lock-in period for PPF is 15 years. Most investors don’t want to invest for that kind of tenure.

Since FDs offer fixed returns, and the tenure isn’t too long (like PPF), tax-saver FDs are the most popular tax-saving investment option among investors.

 

How to open a tax-saver fixed deposit? – Eligibility Criteria, Documents Required, & More

Opening a tax-saver fixed deposit can be as easy as having a conversation with your bank’s representatives. However, before that, you must understand the eligibility criteria for a tax-saver FD.

Currently, individuals falling in any one of the following two categories can invest in a tax-saver FD:

  • Resident Individuals
  • Hindu Undivided Families

If you fall into one of these categories, you will need the following documents to apply for a tax-saver FD:

  • Proof of identity (Aadhar card/Driving licence/passport/voter ID card)
  • Proof of residence (Aadhar card/passport/recent utility bill)
  • PAN card

 

Should You Opt For A Tax-Saver FD?

Let’s begin by talking about the little-known facts about tax-saver FDs that most banks like to leave out when advertising them:

 

There’s A Limit To How Much Tax You Can Save

That’s right, you cannot deduct your entire payable tax with a tax-saver FD (in most cases). There is a hard limit of up to ₹ 1,50,000. That means this is the maximum amount of deduction you can get under Section 80C. Senior citizens can claim a deduction of a maximum of ₹50,000 on the interest earned from a tax-saver FD.

 

Your Returns Are Still Taxed

This may seem a bit ironic but the interest you earn from a tax-saving FD is taxable. As soon as your interest amount exceeds ₹ 40,000 (or ₹ 50,000 for senior citizens) your earnings will be subject to TDS.

 

No Premature Withdrawals

With a regular FD, when an investor may be in urgent need of liquid funds, it is possible to withdraw the FD amount after paying some penalty. However, no such provision is offered with tax saver FDs.

 

No Loan Against FD

One of the biggest advantages associated with FDs is that an investor can avail themself of a loan of up to 95% of their principal amount. However, this advantage is not offered with tax-saver FDs. 

As you can see, while tax-saver FDs do help you save tax of up to ₹1,50,000, they may end up compromising the liquidity of your money.

For this reason, we advise our audience to limit their investments to tax-saver FDs at ₹1,50,000.

If you are looking for an investment opportunity that offers returns better than FDs, and one that isn’t affected by market fluctuations, P2P investment is for you. P2P investment yields much better returns than FD, i.e.up to 12% p.a., and these aren’t affected by how the market is performing. To know more about P2P investment and to get started with the same, download the LenDenClub mobile app today.

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