Amid the ongoing turmoil in the stock market, traditional investment instruments like fixed deposits (FDs) and government-backed savings schemes are gaining the attention of investors. Many are prioritizing safety over high returns and opting for financial instruments that offer stable returns, even if these returns are lower than riskier options like stocks and equities.

If you’re looking for the double benefit of safe returns and tax savings, tax-saving FDs could be the perfect option for your investment portfolio. Fixed deposits (FDs) remain a popular choice among investors, with many offering tax benefits under Section 80C of the Income Tax Act.

The financial year 2024-25 is ending soon, and there’s still time to plan your investments and save on your tax liability. You can claim deductions on investments in tax-saving FDs under the old tax regime.

What Are Tax-Saving Fixed Deposits?

Tax-saving FDs are deposit schemes that allow people to claim a deduction of up to Rs 1.5 lakh annually under Section 80C of the Income Tax Act of 1961. These deposits come with a mandatory lock-in period of five years. The interest rate remains fixed for the entire period, ensuring stable returns despite market fluctuations. However, the interest earned is subject to taxation, and TDS (Tax Deducted at Source) is deducted by the bank.

How Do Tax-Saving FDs Work?

Tax-saving FDs work like traditional FDs. Investors deposit a lump sum amount in a bank or financial institution for a fixed period and earn guaranteed returns at a fixed interest rate over the tenure.

Most tax-saving FDs have a lock-in period of five years, which means the funds cannot be accessed during this time. At the end of the maturity period, the amount is paid after deducting TDS on the interest earned. TDS is applicable if the interest earned exceeds Rs 40,000 in a financial year.

Interest Rates Offered by 5 Banks

  1. ICICI Bank: 7.25% interest for general citizens, 7.80% for senior citizens.
  2. HDFC Bank: 7% interest for general citizens, 7.50% for senior citizens.
  3. Axis Bank: 7% interest for general citizens, 7.75% for senior citizens, with a minimum deposit of Rs 100.
  4. SBI: 6.5% per annum for general citizens, 7.5% per annum for senior citizens.
  5. Kotak Mahindra Bank: 6.2% per annum for general citizens, 6.70% per annum for senior citizens (for deposit tenures between 5-10 years).

Benefits of Tax-Saving FDs

  • Guaranteed Growth: Interest compounds over the tenure, ensuring a steady growth of capital.
  • Low Risk: Fixed deposits are considered one of the safest investment options with minimal risk compared to market-linked instruments.
  • Steady Returns: Unlike mutual funds, tax-saving FDs offer fixed interest rates, making them a reliable option for conservative investors.
  • Higher Interest for Senior Citizens: Most banks offer an additional 0.25% to 0.5% interest to senior citizens, making them more attractive for retirees.
  • Tax Deduction: These deposits qualify for deductions under Section 80C, allowing savings of up to Rs 1.5 lakh annually.

Things to Keep in Mind Before Investing in Tax-Saving FDs

Tax-saving FDs are an excellent investment option for those who want a balance between safety, returns, and tax benefits. While they may not offer the high returns associated with equity investments, their guaranteed returns and low risk make them a reliable choice for many investors.