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. 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.) | 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% |
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.
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. Both Tax Saving Fixed Deposit as well as PPF Accounts can now be opened in Banks as well.
Our advice
PPF is a better instrument than Tax Saving Fixed Deposit. However, the only drawback of PPF is the long maturity period. If a person is comfortable with longer maturity period, he should opt for PPF else opt for Tax Saving Fixed Deposit.
And if you already invested the maximum specified amount of Rs. 1.5 Lakhs in PPF, then you can invest in Tax Saving Fixed Deposit.
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.
- Recommended Read: Tax Free Bonds: Should you be investing in them
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 |
Our advice
Tax Saving Fixed Deposit and Tax Free Bonds are entirely 2 different instruments which cant be compared. The benefit of tax saving fixed deposit is that the principal invested is exempt from tax i.e. it can be claimed as a deduction under Section 80C and the benefit of tax free bonds is that the interest is exempted from the levy of income tax.
