Tax Saving Fixed Deposit (FD): Meaning, Features, Documents Required & How to Open

Financial planning plays a crucial role in securing one’s future. In this regard, one of the popular investment options in India is a Tax Saving Fixed Deposit. It is an excellent investment option for individuals looking to save taxes while earning a fixed return on their savings. By understanding the nuances of this investment option, you can make informed financial decisions and maximise your savings.

What is a Tax Saving Fixed Deposit?

A Tax Saving Fixed Deposit refers to a deposit option provided by banks in India that facilitates tax saving. By investing in it, you not only earn interest on your savings but also enjoy tax deductions on the principal amount invested, up to a certain limit.

Features of a Tax Saving Fixed Deposit?

Here are some features of a Tax Saving Fixed Deposit in India. 

• Tax benefits: Investing in a Tax Saving Fixed Deposit allows you to reduce your taxable income by the amount invested, up to one and a half lakh rupees per financial year. This helps in lowering your overall tax liability.

• Fixed returns: It offers guaranteed returns, ensuring that your investments grow steadily over the deposit tenure.

• Flexibility: They come with flexible tenures ranging from five to ten years, allowing you to align your investment horizon with your financial goals.

• Low risk: They are considered relatively safe investments as they are offered by banks, which are regulated by the country’s apex banking body, Reserve Bank of India (RBI). Your principal amount is protected, and the returns are predictable.

• Liquidity: While they generally have a lock-in period of five years, some banks may offer premature withdrawal options with a penalty or limited access to funds in case of emergencies.

How to open a Tax Saving Fixed Deposit online

Here’s how you can open a Tax Saving Fixed Deposit online. 

• Start by selecting a reputable bank that offers online banking facilities and Tax Saving Fixed Deposits. Research different banks, compare interest rates, and read customer reviews to ensure you choose a reliable and trustworthy institution.

• Once you have selected a bank, visit their official website. Look for the "Fixed Deposit" or "Investments" section on their homepage.

• Navigate through the website to find information specifically related to Tax Saving Fixed Deposits. Look for details regarding interest rates, tenure options, and the online application process.

• Before proceeding, make sure you meet the eligibility criteria specified by the bank. 

• Click on the designated option to start the online application process. You may be prompted to create an account or log in if you are an existing customer.

• Provide accurate information in the online application form. You will need to enter personal details, contact information, and financial information. Make sure to double-check the information before proceeding to the next step.

• Scan or take clear photographs of the required documents and upload them as per the instructions provided. These documents may include your identity proof, address proof, PAN card, and passport-sized photographs.

• Enter the desired/allowed deposit amount and select the tenure for your Tax Saving Fixed Deposit.

• Provide nomination details. 

• Carefully review all the information provided in the application form. If everything is accurate, confirm your submission. 

• After submitting the online application, complete the KYC (Know Your Customer) process as directed by the bank. This may involve verifying your identity, address, and other details through video KYC or by visiting the bank branch if required.

• Once your KYC is successfully completed, transfer the funds for the Tax Saving Fixed Deposit from your linked bank account. Follow the instructions provided by the bank for the fund transfer process.

• After the funds are successfully transferred, you will receive a confirmation from the bank along with a receipt. This confirmation may be sent to your registered email address or available for download through your online banking portal.

Advantages of Tax Saving Fixed Deposit

Here’s a list of the key advantages associated with Tax Saving Fixed Deposits. 

• Tax benefits: The primary advantage of a Tax Saving Fixed Deposit is the tax deduction it offers. By investing in these fixed deposits, you can reduce your taxable income by up to one and a half lakh rupees (annually).

• Guaranteed returns: They provide assured returns, ensuring that your investment grows steadily over time. These fixed deposits come with a predetermined interest rate that remains constant throughout the deposit tenure.

• Secure investment: Tax Saving Fixed Deposits are offered by banks, which are regulated by the Reserve Bank of India (RBI). This makes them a safe and secure investment option, protecting your principal amount.

• Flexible tenure: These fixed deposits come with flexible tenure options, usually ranging from five to ten years. You can choose a tenure that aligns with your financial goals and investment horizon.

• Easy accessibility: Most banks offer Tax Saving Fixed Deposits with the convenience of online banking. You can open and manage your fixed deposit account from the comfort of your home, making it a hassle-free investment avenue.

Disadvantages of Tax Saving Fixed Deposit

Here’s a list of disadvantages associated with Tax Saving Fixed Deposits. 

• Lock-in period: They have a lock-in period of five years. During this period, you cannot withdraw or break the deposit without incurring penalties. This lack of liquidity may restrict your access to funds in case of emergencies.

• Fixed interest rate: While the guaranteed returns are an advantage, the fixed interest rate may become a disadvantage if the market interest rates rise significantly during the deposit tenure. You may miss out on higher returns available on other investment options.

• Tax on interest earnings: The interest earned is taxable. 

• Inflation risk: Fixed deposit interest rates may not always keep pace with inflation. Over time, the real value of your returns may decrease due to the impact of inflation.

Points to remember before opening a Tax Saving Fixed Deposit

Here are some crucial points to note before opening a Tax Saving Fixed Deposit. 

• Assess your financial goals: Before investing in a Tax Saving Fixed Deposit, evaluate your financial goals, time horizon, and risk appetite. Consider other investment options and their potential returns to ensure they align with your objectives.

• Compare interest rates: Different banks offer this option at varying interest rates. Compare the rates offered by multiple banks to get the best possible return on your investment.

• Understand the lock-in period: Remember that these have a lock-in period of five years. Ensure that you don't need immediate access to the funds during this period.

• Plan for tax liability: Although they provide tax benefits, you need to consider the tax implications on the interest earned. Account for the tax liability when evaluating the effective returns on your investment.

• Diversify your portfolio: It's advisable to diversify your investment portfolio instead of relying solely on Tax Saving Fixed Deposits. Consider allocating funds to other investment avenues like mutual funds, stocks, or real estate for better overall returns.

Eligibility Criteria: Required documents

When opening a Tax Saving Fixed Deposit, you will typically need the following documents.

• Identity proof: Aadhaar card, PAN card, Passport, or Voter ID card.

• Address proof: Utility bill, bank statement, or rental agreement.

• PAN card: Permanent Account Number (PAN) card is mandatory for opening a Tax Saving Fixed Deposit.

• Passport-size photographs: Recent passport-sized photographs are required for account opening and KYC purposes.

Who should invest in Tax Saving Fixed Deposits?

Tax Saving Fixed Deposits (TSFD) are suitable for individuals in the following scenarios.

• Tax planning: If you are looking for tax-saving options to reduce your taxable income, TSFDs can be an ideal choice.

• Risk-averse investors: TSFDs offer stability and security, making them suitable for risk-averse investors who prioritise capital protection.

• Short to medium-term financial goals: If you have short to medium-term financial goals, such as purchasing a car, planning a wedding, or funding education, TSFDs can provide a steady source of returns.

• Individuals with low risk tolerance: If you prefer low-risk investments and are not comfortable with market-linked products, TSFDs offer a safe investment avenue.

Frequently Asked Questions (FAQs)

Here’s a list of FAQs related to Tax Saving Fixed Deposits in India.

What is the minimum and maximum investment amount for a Tax Saving Fixed Deposit?

The minimum investment amount can range from INR 100 to INR 10,000. The maximum investment amount is INR 1.5 lakhs per financial year.

Can I prematurely withdraw funds from a Tax Saving Fixed Deposit?

TSFDs typically have a five-year lock-in period. However, some banks may offer premature withdrawal options with certain conditions. It's advisable to check with your bank regarding their premature withdrawal policy.

Are the interest earnings from Tax Saving Fixed Deposits taxable?

Yes, the interest earnings from TSFDs are taxable as per the applicable tax slab. The interest earned is added to your annual income and taxed accordingly.

Can I avail of a loan against my Tax Saving Fixed Deposit?

Yes, some banks allow you to avail of a loan against your TSFD. The loan amount is usually a percentage of the deposit amount and is subject to the bank's terms and conditions.

What happens if I fail to deposit the minimum amount required for a Tax Saving Fixed Deposit?

If you fail to deposit the minimum required amount for a TSFD, your application may be rejected by the bank. It's essential to ensure you meet the minimum deposit criteria to successfully open the fixed deposit.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making related decisions.