Investing in a tax-saving Fixed Deposit (FD) with a bank stands out as a highly favored choice among investors seeking to leverage the benefits of Section 80C within the ambit of the Income Tax Act. Many individuals opt for this investment avenue for tax-saving purposes due to its perceived lower risk when compared to equities. It’s crucial to note, though, that the tax-saving advantages are exclusively accessible to those who adhere to the old tax regime. Under the new tax regime, the benefits of Section 80C tax deductions are not applicable.
Apart from saving tax, interest from FDs can act as a source of regular income for senior citizens to meet their expenses.
Who can invest?
As per existing income tax regulations, tax-saving bank FDs can be opened by individuals and Hindu Undivided Families (HUFs). You have the option to open a tax-saving FD account either with a bank where you already hold a savings account or with another bank, provided the latter allows such investments without mandating the opening of a savings account.
You will have to undergo the know-your-customer (KYC) process. To do the KYC process, you will be required to provide self-attested copies of your ID proof (PAN), address proof (Passport, Driving License etc.), and passport size photographs.
You must also take originals of the documents whose self-attested copy you are submitting with you as bank officials will do the verification before accepting the KYC form.
An investment of up to Rs 1.5 lakh in a financial year is eligible for deduction under section 80C of the Income Tax Act. It’s important to note, however, that the interest paid or accrued on the principal amount is fully taxable in your hands. The interest earned will be added to your income and taxed at the applicable income tax rates based on your income slab.
If interest payments on FDs with a single bank exceed Rs 10,000 in a financial year, then TDS will be deducted by the bank. To avoid TDS, one can submit Form15G or Form 15H, as applicable. “The interest is taxable in line with your tax slab. Besides, the bank will deduct TDS at 10% if your interest income across all deposits and branches exceeds Rs 10,000 in a FY. If you haven’t submitted your PAN, the bank will deduct TDS at 20%,” stated HDFC Bank.
How much tax can I save with a tax-saving FD?
“The amount of tax you can save will depend on the tax bracket you are in and the sum you invest in the FD. If you are in the highest tax-bracket (of 30%) and put Rs 1.5 lakh in the tax-saving FD, you can save up to Rs 46350 (Rs 45,000 in tax, plus Rs 1350 in cess),” as per the HDFC Bank website.
The interest rates offered on these FDs tend to vary among banks. Most banks provide the option to choose between cumulative interest or non-cumulative options for tax-saving FDs. With the cumulative option, the interest accrued on your principal amount will be reinvested and paid to you at the time of maturity. Conversely, with the non-cumulative option, interest will be disbursed to you on a monthly, quarterly, half-yearly, or annual basis, depending on the frequency offered by the bank.
Senior citizens are usually offered higher interest rate on tax-saving FDs.
How to open tax-saving FD with HDFC Bank
How To Open A FD Account?
If you already have a bank account, you can open a fixed deposit by visiting the nearest branch or through your NetBanking account, as per HDFC Bank. Here is the procedure to open a fixed deposit account if you are an HDFC Bank account holder.
How to open a fixed deposit online?
According to the HDFC Bank website, you can open a fixed deposit online in 4 easy steps.
Step 1: Log into your NetBanking account
Step 2: Click the TRANSACT section and choose Open Fixed Deposits
Step 3: Select the branch, enter tenure and amount, appoint a nominee, click continue and then confirm
You can instantly download the fixed deposit advice, which is a receipt for your deposit.
How to open a fixed deposit at the branch?
If you are an HDFC Bank accountholder and want to open an FD by visiting the nearest branch, download the FD application form, fill it up and submit it at the branch.
How to open an FD if you don’t have an account?
If you don’t have a savings account AND wish to open an FD in a bank where you don’t hold an account, then you must submit documents like photo identity, address proof etc and complete your KYC. You will have to submit these documents along with a filled up and signed application form.
Minimum and maximum investment amount
The minimum amount to place an FD for saving tax varies from bank to bank. However, one cannot invest more than Rs 1.5 lakh in a financial year in these deposits.
Tenure of FD
Tax-saving FDs have a fixed tenure of five years. According to the Bank Term Deposit Scheme, 2006, you cannot break these FDs before the expiry of five years from the date of deposit. Unlike the normal FD which can be used as collateral to obtain a loan, tax-saving FD cannot be used as collateral or be pledged to obtain loans.
Type of holding
Tax-saving FD can be placed singly or jointly. However, in case mode of holding is joint, then deduction under section 80C is available only to first holder as mentioned on the FD receipt.