What is a tax-saving FD? All you need to know

Fixed deposites

A few key features distinguish tax-saving fixed deposit schemes from other fixed deposit (FD) accounts – they have a five-year-long lock-in period, they help investors save on taxes, and they do not offer a lot of liquidity to the investor, unlike other FD accounts. Many banks have a seamless online process set up for those who would want to start a fixed deposit. One such bank is IndusInd Bank, wherein customers sign up directly through the banking up without the hassle of physically visiting the branch. Here are all the features of tax-saving FDs that investors must know about. 

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What is a tax-saver fixed deposit account?

Several Indian investors, after opening a fixed deposit account, ask themselves the question, “How to save tax on FD?”. A separate category of FDs can help investors find the answer to this question – tax-saving fixed deposit accounts. A tax-saving FD or tax-saver FD is a fixed deposit account that offers tax exemption to customers, helping them save taxes through their investment. They have a lock-in period of five years and offer high interest rates to customers. IndusInd Bank, for instance, offers an interest rate of upto 7.5% to customers through its FDs. Before investing in a tax-saving FD, investors must know a few more details about them.  

Important points that investors must know before investing in tax-saving FDs:

Investors should first check their eligibility for a tax-saving FD

Different banks have different eligibility criteria for their tax-saving FD accounts. IndusInd Bank customers must meet three basic eligibility criteria to open an FD account with the bank: 

  • The customer must be a citizen of India. 
  • They must be more than eighteen years of age. 
  • They must submit valid KYC documents like PAN and Aadhaar. 

Tax-saving FDs do not offer the option of premature withdrawal or a loan against FD

Unlike normal FD accounts, tax-saving FDs do not permit premature withdrawal. Therefore, the invested corpus in a tax-saving FD is locked in for at least five years. Tax-saving FDs also do not allow the loan against FD option to investors. 

The interest earned through tax-saving FDs is subject to taxation

The Income Tax Department deducts TDS (Tax Deducted at the Source) on the interest earned through a tax-saving FD investment. Banks and financial institutions pay out regular interests to customers and also offer customers the option of having it reinvested in another FD scheme. For individuals, the TDS is applicable when the total interest that they earn through the FD exceeds ₹ 40,000 in a financial year. Senior citizens can claim a tax deduction of up to ₹ 50,000 on the interest earned from deposits under Section 80TTB of the Income Tax Act. 

Tax-saving FDs offer customers the option of choosing a nominee

Banks also offer the option of nomination to customers who choose to invest in a tax-saving FD. However, if the tax-saving FD has been opened on behalf of a minor, banks generally do not offer this facility to the customer. 

Customers require a specific set of documents while opening a tax-saving FD account

Banks require customers to submit two sets of documents while investing in a tax-saving FD – documents for identity proof and address proof. As identity proof, customers must submit any of the following documents: 

  • Passport 
  • PAN card
  • Voter ID
  • Driving License 
  • Government ID card 
  • Senior citizen ID card 

For address proof, customers can provide their passport, telephone bill, electricity bill, or bank statement with a cheque.

This type of FD offers attractive tax concessions and high interest rates

The defining feature of a tax-saving FD are the concessions that it offers in taxation. Individuals can get a tax reduction of up to ₹ 1.5 lakh under Section 80 C of the Income Tax Act by investing in a tax-saving FD. 

Tax-saving FDs can help investors meet two investment goals at once – grow their wealth by minimising risk and save up on taxes. Investors can use IndusInd Bank’s FD calculator to calculate their FD returns in advance and take financial decisions accordingly.