Tax Saver FD Premature Withdrawal

Tax Saver Fixed Deposit is a type of fixed deposit scheme. The scheme helps to save tax up to INR 1,50,000. The scheme has a lock-in period of five years. During this period, it does not allow the withdrawal of money. Therefore, no premature withdrawal facility is offered during the five-year lock-in period. If the maturity period of the scheme extends more than five years, then premature withdrawal is allowed after five years.

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The article not only discusses the premature withdrawal of tax saver fixed deposits, but it also discusses various aspects of this investment instrument. 

What is Tax Saver FD? 

Tax saver fixed deposit is a fixed deposit scheme. It requires depositing a lump sum of money. The fixed deposit has a lock-in period of five years. Like other fixed deposit schemes offered by banks, the tax saver FD offers a fixed interest rate. 

The interest rate varies as per different banks. Even the minimum and maximum amount of deposits also vary. Most banks allow a minimum deposit of INR 1000 or INR 10,000. However, many banks do not offer any limit on maximum deposits. 

The key feature of the tax saver FD scheme is that it allows a tax deduction facility of up to INR 1,50,000 as per section 80C of the Income Tax Act of India. To avail of this tax benefit, the individuals must lock in the money for five years. 

They cannot withdraw money from the fixed deposit account during this time. Due to its tax benefits, the fixed deposit does not offer a premature withdrawal facility. These are the key differences between the tax saver FD scheme and the other FD schemes.

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

Interest Rate of Tax Saver FD 

Different banks offer interest rates for tax saver FDs. The senior citizens get an additional 0.50% interest rate on this FD scheme. In that context, different FD interest rates offered by different banks are listed below. These interest rates are subject to change as per market performance.

Banks General Fixed Deposit Rate FD rate for Senior Citizens
State Bank of India 5.40% 5.90%
HDFC Bank 5.30% 5.80%
Induslnd Bank 6.75% 7.25%
IDBI Bank 5.20% 5.70%
Federal Bank 5.50% 6.00%
Yes Bank 6.50% 7.00%
Axis Bank 5.50% 6.00%
RBL Bank 6.50% 7.00%
IDFC First Bank 5.75% 6.25%
DCB Bank 6.95% 7.45%

*These interest rates change from time to time. 

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Premature Withdrawal of Tax Saver FD 

  • The tax saver FD has a lock-in period of five years. Before this period, premature withdrawal is not allowed. However, if the death occurs, then the levy of penalty will be exempted. The legal heir or nominee will be offered premature payment even before the lock-in period.

  • If the scheme does not have any nominee, then in case of the investor’s death, the sum of money will be paid to the legal heir from the respective branch of the bank. 

  • Most the tax saver FD scheme has a maturity period of 10 years. The lock-in period of five years does not allow money withdrawal from the account. However, after five years, the money can be withdrawn. In case of emergency, the money from the tax saver FD can be withdrawn prematurely if the scheme passes the five years of the lock-in period. In that case, the investors must pay the penalty as a deduction in the interest rate. Therefore, for any premature withdrawal, the sum of money withdrawn will be much less than the total expected maturity value of the fixed deposit scheme.

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Benefits of Tax Saving Fixed Deposits

  • A tax saver FD account is the most effective scheme for risk-averse investors. It is not market-linked. Therefore, an investor can be assured of a fixed rate of return. The scheme is not accepted as collateral security.

  • The interest of the fixed deposit scheme is compounded during its lock-in period. During this period, the investor cannot withdraw money. It helps to offer a high amount of money at maturity.

  • The tax saver FD scheme does not offer a market-linked interest rate, unlike the mutual funds. The fixed rate of interest helps the investors to calculate the return using the online FD calculator. It helps them to make better plans with the money received at maturity.

  • The fixed deposit scheme offers around 0.25% to 0.50% extra interest rates for senior citizens. Therefore, if they invest a lump sum of money in this tax saver FD scheme after retirement, they will be able to earn a high-interest rate while saving tax deductions from the invested money. They are required to submit Form 15 to process the operations effectively.

  • Tax Saver FD scheme for tax deduction is eligible under the Income Tax Act of India’s section 80C. Investors can claim a tax deduction of up to INR 1,50,000. However, it is worth mentioning that this fixed deposit account is like other fixed deposit schemes offered by the bank. The only difference is that it does not allow any premature withdrawal.

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FAQs

  • Can I take a loan against my tax saver FD scheme?

    The tax saver fixed deposit scheme does not offer any collateral facility. Therefore, investors cannot take any loans or overdrafts with the help of a tax saver fixed deposit scheme.
  • When can I withdraw the money from the tax saver fixed deposit scheme?

    The scheme does not allow the withdrawal of money during the lock-in period. It has five years lock-in period. Once the lock-in period is over, the investors can withdraw money from the scheme. However, for any premature withdrawal, they must pay the penalty accordingly.
  • Is the interest earned from the fixed deposit taxable?

    The interest earned from the fixed deposit account is taxable. The tax saver fixed deposit scheme offers a tax deduction facility up to INR 1,50,000. This tax deduction facility is offered as per Section 80C of the Income Tax Act of India. However, in this scheme, if the interest amounts to more than INR 10,000, it is taxable.

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