Your Money: Know how tax-saver fixed deposits work    

All resident individuals and Hindu Undivided Families (HUFs) are allowed to invest in the tax-saver FDs.

There are various types of tax-saving investment options available, but if you are looking for something that comes with minimal investment risk and is extremely easy to understand and operate, you cannot ignore tax-saver fixed deposits (FD). And unlike normal FDs, these qualify for tax-deduction benefits up to Rs 1.5 lakh in a financial year under Section 80C of the Income Tax Act which can, hence, bring down your taxable income to the extent of your investment. So, before you start investing in a tax-saver FD, it would be better to know its features and key benefits.

Key benefits of tax-saver FDs
All resident individuals and Hindu Undivided Families (HUFs) are allowed to invest in the tax-saver FDs. These FDs are a little different from regular FDs. They come with a lock-in period of five years, investment amount can be from Rs 100 to Rs 1.5 lakh in a financial year and the interest earned is subject to tax at the applicable slab rate. For non-senior citizen investors, if the interest from a tax-saver FD during the financial year exceeds Rs 40,000, the bank will deduct TDS from such interest income.

In the case of senior citizen investors, the threshold for TDS deduction is Rs 50,000. If your total interest from FDs in a particular bank is expected to exceed the threshold for TDS deduction and your total income is not taxable, you can submit Form-15G (if you’re a non-senior citizen) or Form-15H (if you’re a senior citizen depositor) to the bank requesting them to not deduct the TDS.

That said, senior citizen depositors usually get preferential interest rates up to 0.75% p.a. compared to non-senior citizen depositors. Senior citizens also get tax exemption on interest income up to Rs 50,000 from banks FDs. However, there is no such tax exemption for non-senior citizen investors. Investors are not allowed to liquidate tax-saver FDs before the completion of 5-year maturity period and there is no auto-renewal facility.

Also, loans or overdrafts against tax-saver FDs are not allowed. However, investors can choose between cumulative and non-cumulative interest payouts, the latter usually available in monthly or quarterly payouts. Now, tax-saver FDs can be opened in either individual or joint mode of holding and an adult can open such an FD jointly with a minor. However, in the case of joint holding, only the first holder can claim tax deduction benefits for the investments.

Key points to keep in mind
You can open a tax-saver FD by visiting your bank branch or through online modes or mobile banking. Banks usually allow you to invest in FDs even if you don’t hold regular savings accounts with them. This is a great tax-saving investment option for risk-averse investors as it is less risky than market-linked Equity Linked Savings Schemes and have a shorter lock-in than Public Provident Fund.

However, senior citizen investors can also consider Senior Citizen Savings Scheme (SCSS) for slightly higher returns than FDs without taking undue risks and for bigger investment requirements.

People above the age of 60 years can invest Rs 1000 to Rs 15 lakh in the government-backed SCSS which is currently offering an interest rate of 7.4% p.a. Even SCSS comes with a lock-in of 5 years like tax-saver FDs but can also be extended by another three years.

While investing in tax-saver FDs, check the best interest rate offered by various banks. This is critical because once you’ve invested in a tax-saver FD, you cannot liquidate such investment before five years.

The author is CEO, BankBazaar.com