Personal Finance

IDFC First Bank Tax Saver Deposit: Lock into this attractive tax-saver deposit

Radhika Merwin | Updated on March 10, 2019 Published on March 10, 2019

With the RBI embarking on rate cuts, it may be prudent to lock into good rates now

If you are looking for tax- saving investments that offer safety and predictability, tax-saving bank fixed deposits fit the bill. Since investments — of up to ₹1.5 lakh a year — made into such deposits get deduction from income for tax purposes under Section 80 C, the effective yield shoots up, making them an attractive option. But, interest earned on tax- saving deposits will be taxed at your slab rate.

Offering 7.75 per cent, IDFC First Bank’s five-year Tax Saver deposit is among the more attractive options in this category.

High effective yield

The principal invested under tax-saving bank deposits are exempt under Section 80 C, up to ₹1.5 lakh a year. This bumps up your effective yield. For instance, if you put in ₹1 lakh and you are in the 10 per cent tax bracket, the investment you make works out to ₹89,600 (10.4 per cent tax break including cess).

At 7.75 per cent, the effective post-tax yield works out to 9.4, 11.4 and 13.8 per cent for investors in the 10, 20 and 30 per cent tax bracket, respectively. Hence, this deposit scores better than other plain-vanilla bank deposits offering 6.75-7.5 per cent for a three to five-year fixed deposit.

With the RBI embarking on rate cuts, it may be prudent for investors to lock into good rates currently on offer. As inflation trends have kindled hopes of more rate cuts, deposit rates may start to moderate over the next year.

Locking into a post-tax yield of nearly 14 per cent (at 30 per cent tax bracket) for five years is a good option for those who haven’t exhausted their investment limit under Section 80 C. If you have exhausted your options under post-office schemes and prefer not to take market risk through equity-linked savings schemes, tax-saving deposits are a tidy option.

But there are some conditions to note in tax-saving deposits.

As in the case of regular fixed deposits, tax-saving deposits cannot be pledged as security to get loans.

Also, premature withdrawal is not allowed for tax-saving deposits. In case of regular FDs, withdrawal is allowed in many cases, albeit with some penalty.

Auto-renewal is also not available in tax-saving FDs.

The minimum amount for opening a IDFC First tax- saving FD is ₹10,000. Also, in case the FD is opened in joint mode, the tax benefit will be extended only to the primary holder.

About IDFC First Bank

In 2014, after the RBI granted an in-principle approval to IDFC Ltd to set up a new bank, IDFC Bank was created by the demerger of the infrastructure lending business of IDFC to IDFC Bank in 2015. In January 2018, IDFC Bank and Capital First announced their merger plans and IDFC First Bank was founded as a new entity in December 2018.

The new combined entity has loan assets of over ₹1 lakh crore as of December 2018, with 34 per cent in the retail segment. The gross NPA of the bank stood at 1.97 per cent.

Published on March 10, 2019

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