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The financial year is fast coming to a close. This is when the buzz is all about tax planning. There are many products in the market investors can opt for, for tax deductions according to their needs. One such avenue is the tax saving FD.
What is a tax saving FD?
Tax saving FD is like a regular FD with some variations. It is eligible for deduction under section 80C of the Income-Tax Act, which means the maximum deposit that can be made here is ₹1,50,000 as this is the maximum deduction allowed under the section while the interest accrued will be taxable. This deposit can be offered by commercial banks except co-operative and rural banks.
The minimum lock-in period for this deposit is five years and maximum 10. Unlike regular FDs, premature withdrawals and loan against deposits are not available for these deposits. The deposit can be held in joint account, but the tax benefit is available to the primary account holder only. On maturity of the deposit there is no option of automatic renewal, and the proceeds will be credited to the bank account provided.
Return profile and alternate instruments
At present, banks offer interest for tax savings deposits in the range of 5.75- 7.75 per cent per annum (as of February 3, 2023), the rate of interest offered varies from bank to bank. The regular FDs, particularly in the tenure of 2-3 years, provide interest rate of 6-7.85 per cent per annum (as of February 3, 2023), which is higher than the 5-year deposits and is for a shorter tenure; most banks provide additional 0.25-0.5 per cent for senior citizens on the deposits. The regular FDs allow premature withdrawal and loan against deposits.
The 5-year time deposit of post office is available at 7 per cent (subject to review by the finance ministry every quarter) and this deposit is also eligible for deduction under section 80C. Depositors can go for premature withdrawals and pledging of the deposits with intimation to the post office; on the date of maturity the deposit will be auto renewed if not informed otherwise.
Our picks
The maximum amount that can be deposited here is ₹ 1,50,000 which is well within the DICGC cover and hence these deposits are safe. DCB Bank is offering 7.6 per cent on tax saver deposits of five years for regular citizens and 8.10 per cent for senior citizens. Our second pick is AU Small Finance Bank which offers 7.2 per cent for regular citizen for a period of five years while senior citizens get 7.7 per cent. Next best rate is from Axis Bank which gives 7 per cent for regular FDs and 7.7 per cent for senior citizens, followed by ICICI Bank and HDFC Bank which gives 7 per cent to regular citizens and 7.5 per cent for senior citizens.
Who can go for it?
Tax saving FD may not be very attractive to the high income segment but for people in the lower income bracket this might be more inviting. Consider this: an investor has gross total income of ₹6,00,000 and claims a total deduction of ₹50,000 u/s 80C. If the investor goes for a tax saving FD of ₹60,000 the taxable income will be ₹4,90,000, which will bring him to 5 per cent tax slab from 20 per cent slab (assuming old tax regime). This can be beneficial to senior citizens also as this gives assured returns and tax deduction at the same time.
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