What Are the Advantages and Disadvantages of Tax Saving Fixed Deposit

What Are the Advantages and Disadvantages of Tax Saving Fixed Deposit

Evident to its name, tax saving Fixed Deposit helps you to save your income tax. It is also called 5 years tax saving FD and by investing your money in it, you can have a right to receive a tax deduction under section 80C of Income Tax act. The maximum tax deduction that you get under this FD is of INR 1.5 Lacs.

The minimum amount with which you can open the tax saving fix deposit is Rs. 100. This minimum amount required for Tax Saving FD may vary from bank to bank according to their terms and conditions.

The maximum amount required for opening FD, as mentioned above is 1.5 lacs. One thing to note in this kind of FD is that a person cannot withdraw from FD before its maturity period. The tax saving FD is a lock for 5 years.

One of the best benefits of this FD is that it not only helps in tax deduction but is also helpful in gaining a fixed rate of high interest.

Any individual person or a person from a Hindu Undivided Family with Permanent Account Number can make the deposit under the scheme.

Major Types of Deposits

Tax Saving Fixed Deposit is available in the following two forms:

A. Single Holder Type Deposit

This kind of FD is issued to either the Karta of the Hindu Undivided Family or to an individual for himself.

B. Joint Holder Deposit

This kind of FD is issued jointly either to two adults or to an adult with a minor. The payment will be done either to the holder of FD or to the survivor. The deduction shall be only available to the first holder of the deposit.

Provision for Interest

A person gets a higher rate of interest in Fix Deposit than the saving accounts. Generally, the interest rates vary between 7% to 8% per annum.

The senior citizens are benefited more in this FD as they are offered better and higher interest rates when compared to the individuals.

Even the FD with the long-term tenure attracts higher interest gains.

Advantages of Tax Saving Fixed Deposits

1. Exemption in Tax

The amount deposited under FDs are exempted from taxation. Be it a salary-based person or a businessman, everyone uses FD as a tax saving option. The maximum tax exemption that one can get under FD regime is INR 1.5 Lacs.

2. Automatic Renewal

The whole process of Fixed Deposit is done through online basis. Thus, it gets automatically renewed, and an individual does not have to go to the bank every for the renewal of the Fix Deposit.

3. Easy Accessibility

The Fix Deposit can easily be opened, access and managed with the process of internet banking. One can avail the facility of FD to all the public and private sector banks in India. The completion of your KYC formality with your bank makes the process easier.

4. High Security

One of the most important benefits of tax saving fixed deposit is that it does not get affected by the market fluctuation. The rate remains the same irrespective of the market conditions until the date of its maturity.

5. HUF Save More Taxes

The Fix Deposit from the HUF (Hindu Undivided Family) is benefited more from Fix Deposit. People from the HUF are taxed separately.

Some More Advantages of Tax Saving Fix Deposit

  • One can open numerous FD account in or in many banks and can get exempted from the taxation until FD reaches INR 1.5 Lacs.
  • FD not only helps in acquiring loan but also extends up to 90% of the principal.
  • For senior citizen tax saving FD has a maximum benefit where they will be offered as high as 10% of interest. Higher rates help them in getting higher income.
  • There are special benefits of FD to Non-resident Indians. NRI can open FD account with INR or any other foreign currency and can get various benefits such as –
    • Interest earned is exempted from tax.
    • Interest earned at maturity is repatriable fully.
    • Facilitate NRI to take a loan on NRE FD account. (Non-Resident External)
  • FD accounts are easily transferrable.
  • One can get the interest on FD without reducing TDS from it by filling form 15-H.

Disadvantages of Tax Saving Fixed Deposit

We have discussed the benefits of Fix Deposit, and while discussing the same, it would be great if we also discuss the disadvantages of Fix Deposit to get the rationalize view on the same.

Following are the major disadvantages of Fix Deposit:

  • The interest on the fix deposit is taxable. While filing ITR it comes under the head of “income from the other sources”.
  • The deduction of TDS from interest gained from FD is one of the drawbacks of FD account. Though a depositor can opt out from TDS and pay all the interest at the maturity.
  • The interest rate of FD is lesser than of Mutual Funds. On the one hand, where from FD one can get highest up to 10% of interest, on the other hand, mutual funds return offers interest up to 20% to 30%.
  • Fixed interest rate throughout the full tenure of FD is also one of the main disadvantages of tax saving fix deposit.

Some Frequently Asked Questions Related to Tax Saving Fixed Deposit

Q. When FD gets matured, what happens after that?

A. The amount deposited with interest will be transferred to your account.

Q. Is there any particular period for Tax Saving Fix Deposit?

A. The time of Tax Saving Fix Deposit has Lock-in period of 5 years. It means you can’t withdraw money before 5 years.

Q. Are there any risk in tax saving Fix Deposit?

A. Tax saving fix deposit is risk-free. Deposited amount is fully protected from all kinds of uncertainties. Even the returns are also guaranteed.

Q. What are the limit rate of tax-saving Fix Deposit?

A. Minimum – INR 100 and Maximum – INR 1.5 lacs per annum.

Q. Who all are eligible to invest tax saving FD?

A. Following people can invest in FD

  • Any Indian Citizen
  • Senior Citizen
  • A person from Hindu Undivided Family
  • HUFs
  • NRIs


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