Individuals have their preferences when it comes to savings. An investor’s choice of saving instruments depends on the desired amount he/she wishes to save, risk appetite, the purpose of saving, and the time horizon for the same. One of the popular choices in this regard is a tax-saving fixed deposit (FD) since it offers tax benefits alongside stable returns regardless of market fluctuations.

What is a Tax Saving FD?

A tax-saving fixed deposit is a type of fixed deposit that extends tax deductions under Section 80C of the Income Tax Act, 1961. Investors can claim a tax deduction of up to Rs 1.5 lakh per annum through this instrument. 

Additionally, it is important to note that these fixed deposits are the same as any other bank FD. However, in addition to general fixed deposit accounts, banks offer a 5-year FD scheme specifically for the purpose of tax saving. 

Features of Tax Saving FDs

These fixed deposits have a number of features and benefits, a few of which are highlighted below:

  • While the rate of interest with regular FDs and tax-saving FDs are more or less similar, the interest rate is higher than a savings account.
  • Interest earned on tax-saving fixed deposits is taxable.
  • These fixed deposits have a minimum lock-in period of five years, which individuals can extend for a longer tenure as well.
  • The minimum amount that can be deposited is Rs 1,000 (in multiples of Rs 100).
  • The maximum deposit amount is Rs 1.5 lakh in a financial year (and in multiples of Rs 100).
  • These can be booked with quarterly, maturity, half-yearly or monthly payout.

Who is eligible to invest? 

People who are from the following can invest:

  • Resident individuals and
  • Hindu Undivided Families 

The above-mentioned individuals can open a tax saving FD with a bank or post office, or sometimes even with a non-banking financial company. 

Points to Remember Before Investing in Tax Saving FD

Given the features and benefits of a tax saving fixed deposit, it can be enticing for risk-averse investors to opt for it. That said, one must bear a few points in mind before investing:

Maximum limit on tax deduction

As mentioned earlier, investors can claim an income tax deduction of up to Rs. 1,50,000 in a financial year against these FDs. On the other hand, senior citizens can avail of a deduction amounting to a maximum of Rs. 50,000 on the interest earned from tax-saving fixed deposits under Section 80TTB.