Fixed Deposit Income Tax Exemption

A fixed deposit is considered the best investment option for those looking for a stable return without exposing themselves to the volatile market. Many people prefer Fixed Deposit because it offers a guaranteed interest rate regardless of the market fluctuations. Several NBFCs, HFCs, and scheduled commercial banks in India offer fixed deposits.

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Maximum returns Offered by Guaranteed

6.5%**

Fixed Deposits

(by SBI bank)

(5-10 Years)

7.1%***

Public Provident Fund

(other popular options)

(15 Years)

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Fixed deposits also offer tax benefits to every investor. Let us explore it in detail.

How Does a Tax Exemption on Fixed Deposit Work?

The government introduced the tax exemption in Fixed Deposit for investment for 5 to 10 years in 2006 to boost the investment. You need to deposit a lump-sum amount for a particular duration. Your investment will remain the same regardless of future interest rate fluctuations with the locked interest rate. 

Comparison Between
Fixed Deposits, Guaranteed Return Plans & Debt Mutual Fund
Guaranteed Return Plans, Fixed Deposits &
Debt Mutual Fund
Guaranteed Return Plans
Returns Before Tax
7.5% (TAX-FREE)
Returns After Tax
7.5%
Guaranteed Returns
Yes
Life Cover
Yes
Tax on Profit
Tax Free*
Risk
No Risk
awards
Still Better than FD’s and Debt Mutual Fund
Fixed Deposits
Returns Before Tax
7% (TAXABLE)
Returns After Tax
4.8%
Guaranteed Returns
Yes
Life Cover
No
Tax on Profit
Taxable
Risk
Low Risk
Debt Mutual Fund
Returns Before Tax
8% (TAXABLE)
Returns After Tax
5.5%
Guaranteed Returns
No
Life Cover
No
Tax on Profit
Taxable
Risk
High Risk
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*For annual premium upto ₹5 Lacs

Features of Tax Exemption on FD 

Multiple features offered under the FD scheme are:

  • An investor can claim income tax exemption on investments up to Rs 1.5 lakh when investing in Fixed Deposits.

  • As part of a Tax Saving Fixed Deposit, interest earned is taxable, which is deducted at source.

  • There are no premature withdrawals, loans, or overdraft (OD) facilities for tax-saving FDs. Regular Fixed Deposits provide a loan facility against deposits.

  • The tax savings FD interest rate remained unchanged over five years

  • Different banks offer different FD interest rates for different types of clients, including Indian citizens and Hindu Undivided Families (HUF).

  • The interest payouts are flexible; you can choose a monthly or quarterly payout or reinvest in the principal.

  • Tax Saving Fixed Deposits do not have an automatic renewal option.

  • Tax Saving FDs can be held in a single or joint account. Tax Saving FDs can be held in a single or joint account.

  • The majority of public and private sector banks offer these FD's except for cooperative and rural banks.

  • Post office fixed deposit accounts can be transferred between post offices.

  • The interest earned on TDSA accounts is taxable according to the investor's tax bracket. You can avoid TDS deduction on interest under Section 80 TTB. You need to submit Form 15G for regular individuals or Form 15H for senior citizens to the bank.

* Tax benefit is subject to changes in tax laws. Standard T& C apply."

Who Are Eligible To Invest in FD for Tax Exemption? 

Below are some types of investors who can consider FD for Tax Exemption:

  • Residents of India

  • Senior citizens

  • Joint account holders (maybe two or more than two)

  • Non-Resident Indians (NRIs)

  • Societies, trusts, associations, clubs, etc.

  • Sole-proprietorship companies

  • Educational and religious institutions

  • Partnership companies

  • Blind people

  • Minors

  • Illiterate people

If you do not have a PAN Card, the first step you need to take is to apply for one. Then you can invest in Tax Exemption FD because all the investors, as mentioned above, should have a PAN CARD if they intend to invest in the tax-saving fixed deposits.

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People also read: Tax saving fd

Documents Required for Tax Exemption FD

  1. Proof of Identity

    • Passport

    • PAN Card

    • Aadhaar Card

    • Voter's ID Card

    • Driver's License

  2. Proof of Residence

    • Passport

    • Bank Statement with a bank cheque

    • Aadhaar Card

  3. Proof of Date of Birth

    • PAN Card

    • Voter ID

    • Aadhaar Card

    • Certificate of Service Discharge

Advantages of Investing in FD

Some advantages of investing in FD are:

  • Depositing your funds in tax exemption FD can lower your tax liability. According to Section 80C, investment in this type of fixed deposit is deducted from the total income up to Rs 1.5 lakhs. 

  • There are no restrictions on investors. They can open their tax exemption FD account from any bank or financial institution. Any salaried person or self-employed individual is free to open their account in any bank of their choice and start earning benefits from the tax exemption FD, as provided by Section 80C.

  • Several banks provide interest on FDs at higher rates for individuals over the age of 60. Hence, senior citizens are the ones who can gain more benefit from the tax exemption FD. 

  • Compared to other tax exemption services, FD has relatively low risk, as its interest rate does not fluctuate with the market. This is because the interest rates fixed by the bank remain the same throughout the year. 

  • There is no maintenance needed for FDs. You can deposit the money and can stay at ease.

FD interest rates India have fallen consistently over the last 12 years.
Invest in Plans that offer Guaranteed Returns for over 25 Years

Limitations of Tax Exemption on FD

Fixed deposits also have their limitation in offering benefits. Here are some of them:

  • Only individuals and HUFs are eligible for making deposits in Tax Exemption FD.

  • You cannot withdraw the fund before the maturity period, which is 5 years, under any circumstances.

  • As per Section 80C, the deposit should not exceed the amount of Rs. 1.5 Lakh. The amount invested is meant to cut from the total gross income to arrive at the taxable income.

  • An individual willing to open a tax exemption FD account can only open through public or private sector banks, except rural or cooperative banks. However, the deposit made in Post Office Time Deposit for 5 years also makes an individual eligible for tax deductions under Section 80C.

  • The interest earned on the deposit should not exceed Rs. 40,000 in a financial year, else that would be taxable.  

Comparison With Other Tax Saving Instruments

Below we compare the Tax Exemption Fixed Deposit with ELSS tax saving mutual fund and other schemes such as PPF, NSC, or NPS. Though FDs are not affected by market fluctuation and give out guaranteed returns, FD returns are taxable once it reaches the limit of Rs. 40,000. However, ELSS gives out a higher ROI and is completely tax-free. 

If you are looking for a guaranteed return with a fixed rate of interest, then you can opt for Tax Exemption FD.

Investment Type Return (%) Locked-in period (Years) Tax Deducted on Returns
PPF (Public Provident Fund) 7-8 15 Years No
NPS (National Pension System) 8-10 Till Retirement Partially Deducted
NSC (National Savings Certificate) 6-8 5 Years Yes
Tax Exemption Fixed Deposit 5-7 5 Years Yes
ELSS Funds 12-15 3 Years Partially Deducted

In Conclusion

Investing in FD for tax exemption comes with several perks and benefits. Though it has a downside of its own, it can be considered an excellent investing instrument because of no risk of market fluctuations and a high return on investment.

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FAQs

  • What happens when the tax exemption FD is matured?

    When the FD gets matured, the maturity amount is transferred to the savings account of the investor.
  • Can senior citizens invest in tax exemption FD?

    Senior citizens are also eligible to invest in FD, and in fact, they get a slightly high rate of interest than others. 
  • Is it safe to invest in tax exemption FD?

    Yes, investing your funds in tax-saving FD is safe because of the fixed interest rate. Market fluctuations do not affect the FD. 
  • Is premature withdrawal possible from the FD?

    No, FD does not allow premature withdrawal. However, the fund can be liquidated. 
  • With tax saving FD, how many deductions can an individual claim?

    In Tax Exemption FD, an individual can claim tax deductions up to Rs. 1.5 lakh annually.
* Applicable for Titanium variant of Max Life Smart Fixed-return Digital (Premium payment of 5 years, Policy term of 10 years) and a healthy male of 18 years old paying Rs. 30,000/- monthly (exclusive of all applicable taxes)
** Fixed deposit rate applicable for 5 year's 1 day to 10 years for investment amount less< 2 Crore ( Not for senior citizens).
*** PPF interest rate applicable for 15 years for investment amount upto 1.5 Lac
+ Trad plans with a premium above 5 lakhs would be taxed as per applicable tax slabs post 31st march 2023
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