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Are Fixed Deposits a Good Option for Tax Savings?


Last Updated on August 19, 2022 by Kanakkupillai

Are Fixed Deposits a Good Option for Tax Savings?

Financial institutions provide fixed deposit accounts as a form of investment product. The investor would fix the lump sum in this kind for a specific amount of time. The maturity term is when you will get the interest and principal of the set amount.

Set deposits help you save on taxes not only provide fixed returns, but also do so by allowing you to take advantage of an exemption provided by section 80C of the Income Tax Act of 1961.

A tax-saving fixed deposit can be opened for as little as 100 and as much as 1.5 lakh. The deposit has a five-year lock-in term. The tax-saving deposit gives interest payments either monthly or quarterly. If a deposit is opened jointly by an account holder and his spouse, the main holder will receive the tax advantage.

The following are the main attributes of a tax-saving fixed deposit:

  • Up to a total of 1.5 lakh, the amount deposited in tax-saving fixed deposits is excluded from income tax.However, the interest on the FD is taxed.
  • Interest is computed every three months. When interest is reinvested, it is compounded by adding the interest from the previous quarter to the principle.
  • It is one of the safest investing options.
  • The five-year lock-in term for the tax-saving fixed deposit.
  • Tax-saving FDs do not permit early withdrawals or loans against them, in contrast to conventional FDs.
  • The interest rate on it is set for a period of five years.

Different FD Accounts

Different types of fixed deposit accounts exist depending on the advantages of various accounts, account holders, and the reason for creating the account. The many kinds of FD accounts are as follows:

  • An ordinary FD accounts

The target audience for this account is those under the age of sixty. Such accounts continue to pay less interest than FD accounts for older persons.

  • FD Account for Senior Citizens

This is intended just for persons over 60. These accounts earn more interest than typical FD accounts do. The monthly interest payment plan is available to these account holders so they can cover their regular costs.

  • Business FD Account

Different interest rates and deposit terms are available from banks. These organisations are permitted to deposit extra funds and profits in these FD accounts until they need the money.

  • FD Account for Tax Savings

People use these FD accounts, which have a minimum five-year lock-in term, to reduce income taxes. According to section 80C of the Income Tax Act of 1961, these deposits are tax deductible.

  • NRO FD Account

Such accounts may be opened by Indians with Overseas Citizenship (OCI), Indians of Indian Origin (PIO), and Indians who are not residents of India (NRI). Only NRO FD accounts are permitted for the deposit of any revenue made in Indian rupees.An Indian resident who comes under one of the categories of relatives listed in Section 6 of the Companies Act of 1956 and is an NRI may jointly hold this account with them.

  • FD Account NRE

This account may be opened by two or more NRIs. You can exchange foreign cash that you have earned outside of India for local currency. Both the money and interest from this account may be repatriated. According to Section 10(4) of the Income Tax Act, the interest income from this account is tax-exempt.

  • FD Account FCNR

This account is available to NRIs. The money generated outside of India can be deposited. US dollars, euros, British pounds, Japanese yen, and other currencies are among the accepted ones. With stronger returns, you may keep your money in the same currency.

  • Monthly Payment on FD Account

These accounts pay monthly cumulative interest. The accumulated interest is not compounded and is not applied to the principal. The monthly interest payment can be made to your savings account.

  • FD With Maturity Pay-out Account

Over the course of the deposit period, interest accumulates in this account. When it matures, the principal and interest components will have compounded.

Savings on Taxes for Fixed Deposits

The fixed deposit account also enables tax savings under Section 80C of the Income Tax Act’s provision for tax deductions. The maximum amount you might put in the tax-saver fixed deposit account is Rs. 1.5 lakh. This plan guarantees both returns and capital protection.

You can avoid taking a tax deduction if your whole income is less than the taxable limit. You may do this by giving your bank Forms 15G and 15H and asking them to not take any TDS.

It’s important to know that interest income is completely taxed. The overall income for the fiscal year and your tax bracket determines your tax obligation. The interest revenue is classified as “Income from Other Sources.”When interest generated on all bank accounts within fiscal year exceeds Rs. 40,000, banks deduct tax at source. To validate the specifics of the deduction, the bank will provide a TDS certificate.

Fixed Deposit Account Benefits

  • The savings habit:

Building a savings account for the future with an FD account might be beneficial. Building new FDs will allow you to grow this corpus.

  • Guaranteed Profits:

At the conclusion of the deposit term, FD accounts guarantee returns on both principal and interest components.

  • Flexibility:

You can select the fixed deposit term based on your needs. This time frame might range from seven days to ten years. There will be greater attention as time goes on.

  • Without Upkeep:

Such accounts do not require maintenance or ongoing contributions of money. Depositing money is just necessary once. There is no requirement for active administration of FD accounts.

  • Simple Liquidity:

Even if there is a lock-in period, you can always sell your investment at any time. In comparison to other investment tools, the requirements are less strict here.

  • Safety:

Account holders are eligible for up to Rs 5 lakh in compensation under the Deposit Insurance and Credit Guarantee Corporation (DICGC).

  • Tax Benefit:

When you invest in the tax-saver FD programme, you are eligible for a tax reduction of up to Rs. 1.5 lakh under Section 80C. Keep in mind that there is a five-year minimum lock-in term.


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