A large percentage of youth in India still depends on FD returns despite many lucrative investment instruments being persistent in the market. This inclination is expected to increase even further as many financial institutions have announced up to 8% interest on fixed deposits.
Besides this new remunerative opportunity, the fixed deposit income tax exemption factor has kept on attracting Indians for consistent financial growth. To know the particulars of this proposition on FDs, continue reading.
Overview of Income Tax Exemption of FDs
Whenever you hear about an FD tax exemption scheme, it refers to a separate category of fixed deposit accounts. These FDs contribute to a tax rebate as per the regulations stated under Section 80C of the Income Tax Act 1961.
The Central Government proposed this idea of fixed deposit income tax exemption in 2006. To become eligible for this scheme, you must pledge a lump sum amount to a financial institution. Though the fixed deposit tax exemption policies apply to joint FDs as well, in those cases, only the primary account holder gets to enjoy the income tax benefits.
Here are some widely talked-about features of tax-saving FDs:
- Although the overall taxable income reduces by investing in tax-saving FDs, you do not experience any difference in tax exemption on FD interest.
- These deposits come with a lock-in period of more than or equal to 5 years.
- Depending on the repo rate fixed by the RBI, the financial institutions change their interest offerings for fixed deposit accounts. So, you need to check with the financial institution you are investing with to learn more.
- Tax-saving fixed deposits won’t allow you to issue an overdraft facility.
- While nearing the tenure completion, you won’t be able to reinvest your yield in a similar fixed deposit, i.e., auto-renewal is not allowed.
Any individual residing within the territorial boundaries of India can opt for a lump sum investment in a tax-saving FD account. Similarly, the members of a Hindu Undivided Family (HUF) can apply for a joint venture as well.
Fixed Deposit Income Tax Deduction Available Under Section 80C
First, you must understand that FD interest tax exemption does not apply to regular citizens. You are eligible for up to ₹1.5 lakh deduction, which gets adjusted from the sum initially deposited in the FD. Here, the key condition is the lock-in period must range between 5-10 years.
Section 80C of the Income Tax Act helps to realise taxable income deductions only on the initial sum deposited in a tax-saving FD. You do not enjoy this benefit for the following years throughout the FD’s tenure.
Fixed Deposit Interest Income Tax Exemption Available Under Section 80 TTB
As per Section 80 TTB of the IT Act, all Indian senior citizens can claim up to ₹50,000 exemption on their income annually when they have invested in tax-saving FDs.
While evaluating the income here, the CBDT (Central Board of Direct Taxes) assumes a cumulative of all the following:
- Interests earned from bank deposits
- Interests credited in post office accounts
- Interests on money deposited in cooperative societies that are associated with banking engagements
Best Tax Saving FDs 2023
In the table below we have listed some of the top-rated fixed deposit income tax exemption policies at present:
| FD Provider | Interest Offered (For Regular Citizens) | Interest Offered (For Senior Individuals) |
| State Bank of India | 6.50% | 7.50% |
| HDFC Bank | 7.00% | 7.50% |
| Axis Bank | 7.00% | 7.75% |
| IDFC Bank | 7.00% | 7.50% |
| Punjab National Bank | 6.50% | 7.00% |
| RBL Bank | 7.10% | 7.60% |
| Kotak Mahindra Bank | 6.20% | 6.70% |
| Bank of Baroda | 6.50% | 7.50% |
Disclaimer: Kindly note down that the interest rates shared in the table are true for the current quarter. After this period, the respective financial institutions may revise the interest rates based on RBI’s discretion on the repo rate.
Benefits of Investing in a Tax-Saving FD
Besides the fact that fixed deposit income tax exemption policies help to minimise your tax liabilities, they also provide some other benefits, like:
- You enjoy more interest margins when compared to a regular savings bank account.
- All you have to do is a one-time deposit. Also, there’s no risk involved with market adversities.
- A tenure extension option is available, and the minimum tenure is only 5 years.
Did You Know?
The RBI, to date, has never fixed any minimum amount for 5 year FD tax exemption schemes. This allows individuals to compare different financial institutions and select the best offer available in the market.
Drawbacks of Investing in a Tax-Saving FD
Though these tax-saving instruments come in handy while managing your TDS, a couple of limitations are sighted. These include:
- A premature withdrawal facility is not awarded in times of a financial emergency.
- Regular citizens do not get a rebate on the interest earned against their fixed deposits.
Key Takeaways
Financial experts recommend that individuals invest in a fixed deposit income tax exemption policy to reduce their TDS. However, several provisions mentioned under Section 80C and Section 80 TTB must be acknowledged before proceeding. Missing them in the first place will lead to improper estimation of returns after the 5-year lock-in period. Finally, while approaching the tenure end, do not expect an auto-renewal feature, as it is absent for these particular FDs.
Fixed Deposit Income Tax Exemption: FAQs
Yes, FDs facilitate tax exemption as per the regulation stated under Section 80C of the IT Act. You are eligible for a rebate of up to ₹1,50,000 on the security deposit in the initial year of investing.
Section 80 TTB clearly states that any Indian above the age of 60 will be eligible for ₹50,000 tax deduction annually on their income. Besides the interest earned from deposits, the income comprises the returns earned from the post office.
The documentation needs are minimal. You have to present a few personal information verifying documents like the PAN card, Aadhar card, senior citizen card, etc. Also, one address proof document will be needed, such as the passport or electricity bill.
You can request the officials of your preferred financial institution online or offline. To apply online, simply head to their website or mobile app and complete the application form. The offline process will require you to visit your nearest branch and go through a bunch of other tedious tasks.
