Tax Saving Fixed Deposit: Max Limit increased to 1.5 Lakh

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To give a boost to the declining interest in fixed deposits of retail investors, the Finance Ministry in the year 2006 announced that all Fixed Deposits with a maturity of not less than 5 years shall be eligible for deduction under Section 80C of the Income Tax Act. Such type of Fixed Deposit is popularly known as Tax Saving Fixed Deposit.

This Announcement came vide Notification No. 23/2006 dated 28-07-2006, through which the Finance Ministry announced the Bank Deposit Term Scheme 2006. This Scheme laid down clear guidelines for Investment in this type of Tax Saving Fixed Deposit.

Tax Saving Fixed Deposit: Guidelines

The following guidelines have been laid out by the Finance Ministry for Investments in Tax Saving Fixed Deposit

  • Maturity: 5 years
  • Minimum Investment: Rs. 100 and in multiple thereof
  • Maximum Investment: Rs. 1,50,000 (Increased from Rs 1 Lakh to Rs. 1.5 Lakh vide Notification No. 63/2014, F.No.142/09/2014‐TPL)
  • Deduction available to: Individual, HUF
  • Premature Withdrawl: Not Available
  • Loan Facility against this FD: Not Available
  • Interest Rate: As offered by the Bank from time to time
  • Tax on Interest earned: As per the Income Tax Slab Rates of the Individual
  • TDS on Interest @ 10%

The Interest Rate to be paid on these Tax Saving Fixed Deposit is decided by the Bank with whom the Investment has been made and most banks are paying Interest in the range of 8.5%-9%. You can check here the rates being offered by various banks.

Effective Annualised Interest Rate on Tax Saving Fixed Deposit

The following table shows the effective Interest earned taking into account the Tax Benefit on such fixed deposits assuming 8.5% Interest Rate

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.) 15228 15228 15228
E Total Pre-Tax Benefit on Deposits (D-C) 8318 7288 6258
F Effective Annual Yield (5 years) 16.64% 13.91% 11.17%

For making Investments in these types of Tax Saving Fixed Deposits which are allowed as deduction under Section 80C, the investor is required to submit an application for the same while making the deposit and shall also furnish copy of his PAN Card to the Banker.

These Investments can either be made in Single Name or in Joint Name. In case the Investment is being made in Joint Name, only the 1st holder is eligible to claim deduction and the 2nd holder cannot avail of deduction for section 80C for Investment in this type of Tax Saving Fixed Deposit.

Tax-saving-fixed-deposit

Difference between making Investment in PPF vs Tax Saving Fixed Deposit

Both PPF as well as Tax Saving Fixed Deposit are regular income earning investments wherein a pre-determined  assured return is given to the Investor. Moreover, an Investor can also claim deduction of a maximum of Rs. 1,50,000 for Investing in any of these Investments.

Recommended Read: Benefits of Investing in PPF Account and PPF Interest Rates

However, there are some differences as well between PPF and Tax Saving Fixed Deposit which have been discussed below:-

Particulars

Tax Saving Fixed Deposit

PPF

Maturity

5 years

15 years

Deduction 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 Withdrawl 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 FD and PPF are fixed by different bodies, they are almost the same with only a slight difference)

Thus, the major difference between Tax Saving Fixed Deposit and PPF is that the Maturity of Tax Saving FD is 5 years which is much less than the maturity of PPF which is 15 years. The whole amount can be withdrawn from Tax Saving FD after 5 years whereas amount only to a certain extent can be withdrawn from PPF from 5th year onwards. Loans are also available on PPF from the 3rd year onwards whereas this facility is not available on Tax Saving FD and amount can be withdrawn only from 5th year onwards.

Another major difference is that Tax is payable on the Interest earned on Tax Saving FD whereas the Interest earned on PPF is Tax Free. Thus the major difference between PPF and Tax Saving Fixed Deposit is of its Maturity and the fact that tax is payable on interest earned on Tax Saving FD whereas the Interest earned on PPF is tax free.

As the Interest on PPF is tax free, the effective interest on PPF turns out to be higher than the effective interest on Tax Saving FD. However, the added interest also comes with higher maturity.

Therefore for someone who can invest in an instrument with a longer maturity, PPF is advisable and for someone who prefers shorter maturity, Tax Saving Fixed Deposit is advisable.

Both Tax Saving Fixed Deposit as well as PPF Accounts can now be opened in Banks as well. (Recommended Read: PPF Account in SBI)

Tax Saving Fixed Deposit vs Tax Free Bonds

Tax Free Bonds are the bonds which are issued with the permission of the Central Govt and the issue opens only for a specific time during the year as compared to tax saving fixed deposits which can be opened anytime during the year.

The interest earned on these tax free bonds is fully exempted from tax. However, the amount invested cannot be claimed as a deduction under Section 80C.

A Comparison of Tax Free Bonds and Tax Saving Fixed Deposit have been done hereunder:-

Particulars Tax Free Bonds Tax Saving Fixed Deposit
Deduction under Section 80C
for amt invested
Not Available Available
Option to invest Can only be invested when
the issue opens
Can be invested anytime
during the year
Tax on Interest earned Exempted Taxable
Maturity 10-20 years Min 5 years
Option to sell before maturity Can be sold on Stock Exchanges Cannot be redeemed before maturity

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.