If the question - ‘how do I save on my income tax deducted from my salary’ has been plaguing you for some time then resort to utilising the tax deductions under Section 80C of the Income Tax Act. One of the most viable options that can be opted for, is investing in tax saving fixed deposits.
The greatest advantage that this has to offer is that it is not dependent on market variations and has a constant interest rate till the time of maturity – it is a safe investment option that gives a fairly good rate of return. Additionally, it is an option that most people are aware about and feel safe investing in it by virtue of its familiarity.
What are the Different Types of FDs You can Invest in?
A fixed deposit account is an investment instrument that is offered by banks and other financial institutions whereby the investor will deposit a lump sum amount for a specific period and receive a fixed rate of interest throughout his or her investment tenure. Private banks tend to offer a slightly higher rate of interest than public sector banks. In short, FD’s have the following features –
| Interest Rate | 2.75% – 7% per annum |
| Minimum Deposit Amount | INR 1,000 |
| Investment Tenure | 7 days - 10 years |
| Interest Compound Frequency | Monthly, quarterly or annually |
| Partial and Mid-term Withdrawal | Allowed with penalty |
| Premature Closure | Allowed with penalty |
The different types of fixed deposit accounts are as follows –
| Type of Account | Brief Description |
| Regular FD Accounts | It is for Indian residents aged less than 60 years. |
| FD Account for Senior Citizen | It is for individuals who are aged more than 60 years. They receive a higher rate of interest and can access the monthly payout option. |
| Corporate FD Account | It is for firms who get to deposit their sums for a separate set of interest rates and tenures. |
| NRO FD Account | It is a facility available for Overseas Citizen of India (OCI), Person of Indian Origin (PIO), and Non-Resident Indian (NRI). If the income is earned in INR, it can only be deposited in NRO FD accounts. It can be jointly held with an Indian citizen too. |
| NRE FD Account | It is a facility that can be opened by two or more NRIs to convert foreign currency into INR. Both the principal and interest are fully repatriable. |
| FCNR FD Account | It is opened by NRIs who deposit money earned overseas in India. The currencies generally accepted are US Dollars, Euro, Sterling, Pounds, Japanese Yen, etc. and it will be retained in the same currency it has been deposited in. |
| FD Account with Monthly Payout | The interest accrued to such accounts will not be added back to the principal, and the interest will not be compounded. |
| FD Account with Maturity Payout | The interest gets accrued over the deposit tenure, gets compounded, and you will receive the principal along with the interest at the date of maturity of the said account. |
| Tax Saving Account | Risk averse individuals can invest in this account and place their money for a minimum lock in a period of 5 years. Deductions under Section 80C of the Income Tax Act can be availed for the same. |
What are the Tax Rates that Apply on Earnings from FDs?
The interest earned on fixed deposits is taxable based on the different income tax slabs.
| TDS Deductions | When Applicable |
| Nil TDS Deduction | When the interest income for a year is less than INR 40,000, the TDS cannot be deducted. |
| TDS Deduction at 10% | The TDS applicable on interest is deducted by the bank at the rate of 10% per annum. In the case where the amount to be paid or already paid is more than INR 10,000, the limit in such a case stands at INR 10,000 per branch of the bank, per individual. Therefore, if the individual is receiving an amount of less than INR 10,000 from three different bank branches that he has deposits in, then TDS will not be deducted. If it exceeds INR 10,000 for a particular branch then TDS will be deducted. |
| TDS Deduction at 20% | For individuals or businesses who have not submitted their PAN number to the bank where they have started a tax saving FD, a TDS deduction at 20% will become applicable. |
| Annual Income does not Exceed INR 2,50,000 | Then TDS is not deductible even if the income that is earned through the deposit exceeds INR 40,000. |
Please Note: Senior Citizens can avail the same benefits that regular citizens are availing for tax saving under Section 80C. Also, if an individual has a total tax liability of zero, and TDS is deducted by the bank, then a TDS refund can be claimed through Form 15H and Form 15G.
An illustration to understand how the tax rates are applicable are as follows –
If Romesh has a fixed deposit for 5 years, and has earned an interest of INR 50,000 per annum. So, the bank is required to deduct TDS on the interest amount at 10% per annum as the interest amount exceeds INR 40,000. If he isn’t paying any tax on his or her income, then TDS will not be deducted.
To summarise a tax saving deposit,
| Investment Option | Description | Eligibility | Liquidity | Rate of interest | Investment Limit | Tax Treatment |
| These are fixed deposits that are taxable. | Resident Indians | Lock-in period of 5 years. | Interest rates differ from one bank to another. | Minimum limit is INR 1,000. | The interest earned is taxable. |
Conclusion
The tax on FD is not paid directly to the Government, but the bank deducts TDS. Tax saving fixed deposits, on the other hand, which are like regular fixed deposits but have a predetermined lock in a period of five years, are an excellent means of saving on one’s tax. Learn more about it in order to derive the maximum benefit out of it.