If you are planning to invest your hard-earned money before March 31, 2024, to save some tax, you must be looking for suitable options. Among the fixed income instruments, tax-saving fixed deposits (FDs) are one of the investment options that will offer a deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961.
However, before you invest in an FD, there are some factors to consider. Given that there are many competing tax-saving fixed income investment options, is FD the best one? Also, though FD interest rates are close to their peak seen in the past 3-4 years, is this a good time to invest in tax-saving FDs as the interest rate cycle is about to turn around? Read here to find out.
Also read: How much tax deduction is available on FD, savings a/c?
What are tax-saving fixed deposits (FDs)? All you need to know
First, let us discuss the features of a tax-saving FD that you must know. It comes with a tenure of five years. No premature withdrawal is allowed in tax-saving fixed deposits. So your money will be locked in for five years.
You can invest a maximum of Rs 1.5 lakh in a tax-saving FD. The minimum investment typically varies from bank to bank.
The interest on tax-saving FDs can be paid out every month or quarter, or reinvested. Do keep in mind that the interest earned on a tax-saving FD will attract tax deducted at source (TDS) as per your tax bracket. For individuals, TDS will apply if the total interest earned exceeds Rs 40,000 in a financial year. Under Section 80TTB, senior citizens are eligible for an annual interest deduction of up to Rs 50,000.
Now the question is where to book an FD. Do not choose a bank just because you have a savings bank account there. Your bank may not always offer the best interest rate. Compare the interest rates offered by other banks.
A higher interest rate on your investment means better returns in the long run. Most banks offer a slightly higher interest rate on tax-saving FDs for senior citizens than non-senior citizens.
To make it easier for you, here’s a compilation of the latest tax-saving FD interest rates offered by various banks.
Tax-saving FD rates of various banks compared: Full list
| Tax-saving FD interest rates | ||
| Bank |
General Citizen |
Senior Citizen |
| State Bank of India | 6.50% | 7.50% |
| HDFC Bank | 7.00% | 7.50% |
| Axis Bank | 7.00% | 7.75% |
| ICICI Bank | 7.00% | 7.50% |
| DCB Bank | 7.40% | 7.90% |
| IndudInd Bank | 7.25% | 7.75% |
| YES Bank | 7.25% | 8.00% |
| RBL Bank | 7.10% | 7.60% |
| Bandhan Bank | 7.00% | 7.50% |
As on February 29, 2024As you can see, most well-known private sector banks offer 7-7.4% interest rates on tax-saving FDs. Senior citizens can even get up to 7.9%. When compared with other similar investment options, only the National Savings Certificate (NSC) offers 7.7% for the January-March quarter. Five-year post office time deposits offer 7.5% for the March quarter. Senior citizens have the option to get 8.2% interest in the Senior Citizen Savings Scheme (SCSS).
However, bank tax-saving FDs could be an attractive option for investors who are not senior citizens, going by the interest rates. Even for senior citizens, some of these banks offer very competing interest rates. This may appeal to those senior citizens who have exhausted the Rs 30 lakh investment limit of SCSS and are still looking for a good fixed income investment option.
Why is now the right time to book your tax-saving FD?
Keep in mind that interest rates on fixed deposits have touched the peak of this cycle. The moment the Reserve Bank of India (RBI) cuts the repo rate, banks will start lowering the interest rate of fixed deposits. Abhishek Kumar, a SEBI-registered investment advisor, says, “As inflation goes down further, the repo rate is bound to go down in the coming quarters.”
On when FD rates will go down, Ajinkya Kulkarni, Co-Founder and CEO of Wint Wealth, says, “We expect the interest rates to start dropping a few quarters down the line.”
If you want to book your FD at a high interest rate and enjoy it for the next five years, consider booking a tax-saving FD right now. Nirav Karkera, Head of Research at Fisdom, says, “Considering how interest rates are elevated right now and the fact that we have hit the plateau in terms of rate hikes, current times offer an opportunity to lock in to higher yields before the reversal cycle kicks in.”
Do keep in mind that if you invest your FD at a high rate, it will apply for the entire deposit tenure of five years.
Kumar says there is a limited time window for investors to book tax-free fixed deposits. “So based on their investment horizon, one can invest in these FDs now.”
This will also give you an opportunity to book your tax-saving FDs at a high interest rate now — a situation that may be elusive next year.
