Tax Saving Fixed Deposit | To encourage retailers to reduce the interest on fixed deposits, the Ministry
of Finance announced in 2006 that all fixed deposits with a term of less than 5 years would be eligible
for exemption under Section 80C of the Income Tax Act. This type of fixed deposit is popularly known
as tax saving fixed deposit.
This announcement was made by the notification dated 23/2006, through which the Ministry of Finance announced the Bank Deposit Term Scheme 2000-2006. This scheme sets clear guidelines for investing in this type of tax saving fixed deposit.
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The Ministry of Finance has laid down the following guidelines for investing in tax saving fixed deposits.
Maturity: 5 years
- Minimum investment: Rs. 100 and more of it
- Maximum investment: Rs. 1,50,000 (Circular No. / 2013/2017, F.No.142/09/2017 Increased from Rs. 1 lakh to Rs. 1.5 lakh as per TPL)
- To discount available: Private, HUF
- Mat Premature withdrawal: Not available
- Advantage against this FD: Not available
- Interest rate: Paid by the bank from time to time
- Tax on interest earned: According to individual income tax slab rate
- TDS 10% on Interest
The interest rate paid on these tax-saving fixed deposits is decided by the bank with which the investment is made. You can check the rates offered by different banks as given below table-
Fixed Deposit interest Rates 2021
Last Updated 16th Jul 2021
The fixed deposits interest rate varies on factors such as Government policies, economic conditions and liquidity conditions in the market.
| Banks | FD Interest Rates | Senior Citizen FD Interest Rates | Tenure |
| HDFC | 6.20% - 6.65% | 6.00% - 6.50% | 33 months to 99 months |
| PNB Housing Finance | 5.90% - 6.70% | 6.15% - 6.95% | 12 months to 120 months |
| Bajaj Finance | 5.65% - 6.50% | 5.90% - 6.75% | 12 months to 60 months |
| SBI | 2.90% - 5.40% | 3.40% - 6.20% | 7 days to 10 years |
| IDFC First Bank | 2.75% - 6.00% | 2.75% - 6.50% | 7 days to 10 years |
| Axis Bank | 2.50% - 5.75% | 2.50% - 6.25% | 7 days to 10 years |
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Effective annual the interest rate on fixed deposits for tax protection
The following table shows the effective interest rates on such fixed deposits at an interest rate of 8.5%.
| S. No. | Particulars | Amount (Rs.) | ||
| Slab Rate – 30% | Slab Rate – 20% | Slab Rate – 10% | ||
| A | Amount Invested | 10,000 | 10,000 | 10,000 |
| B | Immediate Tax Saving (assuming 30% Slab Rate) | 3090 | 2060 | 1030 |
| C | Effective Investment (A-B) | 6910 | 7940 | 8970 |
| D | Maturity Amt of Original Investment (Interest @8.5% p.a.) | 13,382 | 13,382 | 13,382 |
| E | Total Pre-Tax Benefit on Deposits (D-C) | 6,472 | 5,442 | 4,412 |
| F | Effective Annual Yield (5 years) | 14% | 12.50% | 10.50% |
To invest in such tax-saving fixed deposits which are allowed as a discount under section 80C, the investor has to submit an application for the same at the time of deposit and also submit a copy of his PAN card to the banker.
These investments can be made in either a single name or a joint name. Investing in a joint name, only the 1st holder can claim this discount and the 2nd holder will not be able to avail the benefit of Section 80 discount for investing in this type of tax saving fixed deposit.
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The difference between tax-saving fixed deposit vs. PPF investment
However, there are some differences between PPF and Tax Saving Fixed Deposit which are discussed below: -
| Particulars | Tax Saving Fixed Deposit | PPF |
| Maturity | 5 years | 15 years |
| Deduction is available u/s 80C | Rs, 1,50,000 | Rs. 1,50,000 |
| Interest Rate | Fixed by the Bank* | Fixed by the Govt* |
| Tax on Interest earned | As per Income Tax Slab Rate | Exempt |
| Premature Withdrawal Facility | Not Allowed Maturity after 5 years | Available from 5th year onwards but only to a certain extent |
| Loan Facility | Not Allowed Maturity after 5 years | Can be availed from 3rd year onwards |
(* Although the interest on tax-saving FDs and PPFs is fixed by different companies, they are almost the same with only slight differences)
PPF is a better instrument than tax-saving fixed deposit. However, the only drawback of PPF is the long maturity period. If a person feels comfortable in the long run, he should opt for PPF for tax saving fixed deposit.
And if you have already invested a maximum of Rs 1.5 lakh in PPF, after which you can invest in tax saving fixed deposit.
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