For many people, tax planning is often associated with keeping some money safely. Of all the options available, a Tax Saver Fixed Deposit (FD) is often a simple option. Under the Old Tax Regime, individuals can claim deductions for the invested amount under Section 80C of the Income Tax Act, while also earning fixed returns over a predetermined period.
The main appeal of these FDs is that they are practical and safe, especially for investors who prefer fixed returns over risky options. But many people wonder: Is it worth locking your money for five years? To find out, let’s look at taxsaving FDs, their features, benefits, and possible drawbacks.
What is a Tax Saving FD?
Tax Saving FD is a Fixed Deposit plan that comes with a lockin period of 5 years. Most banks offer these FDs for tax savings, often under specific names like Tax Saver FD, as in ICICI Bank. During this lockin period, an individual cannot withdraw the amount or use it for loans. When someone invests in a Tax Saving FD, they get the benefit of a tax deduction, but the money is not easily accessible. Money is blocked for 5 years but individuals can claim a tax deduction of up to ₹1.5 lakh within a year u/s 80C in the Income Tax Act under the Old Tax regime. Many people choose this product both to save taxes and to grow their savings.
Features of Tax Saving FDs
Here are the core features every depositor should know before investing:
- Minimum and maximum deposit: The minimum amount starts at ₹10,000 and the maximum allowed for tax benefit is ₹1.5 lakh in a financial year.
- Tenure: A strict lock-in of five years applies. Premature withdrawal is not permitted.
- Payout options: Investors may choose cumulative deposits (interest reinvested) or noncumulative deposits (monthly/quarterly payouts).
- Nomination facility: Available, but the tax benefit applies only to the primary holder in joint accounts.
- Loan/overdraft facility: Not available against these deposits.
These features make taxsaver deposits quite different from regular FDs, which allow greater flexibility.
Benefits of Choosing a Tax Saving FD
Many people choose FDs offered by leading banks, such as ICICI Bank’s Tax Saver FD, to grow their savings while enjoying tax benefits. Here are the key advantages:
1. Tax Benefits under section 80C
Deposits of up to ₹1.5 lakh can be claimed for deduction, which lowers current taxable income and thus reduces the income tax payable.
2. Assured Returns
The return on deposit is fixed, unlike the return on marketlinked deposits. Market events do not impact these and are ideal for conservative investors.
3. Easy to Invest In
Opening a Tax Saver FD is simple via digital banking platforms like ICICI Bank Net Banking, mobile apps like the iMobile app, or by visiting the branch.
4. Safe and Secure
Backed by banks, these deposits are among the most secure savings options available.
Limitations of Tax Saving FDs
While beneficial, these deposits also come with constraints:
1. LockIn Period
Funds remain tied up for five years. Investors cannot withdraw prematurely or take loans against them.
2. Tax on FD Interest
The interest earned on these deposits is fully taxable as per an individual’s income slab. It is also subject to TDS if the interest crosses the exemption limit.
3. Limited Liquidity
Unlike other investment products, there is no flexibility in withdrawals. This can be a drawback if a sudden requirement arises.
4. Fixed Returns
Although secure, the returns may not always beat inflation over time.
Tax Savings FD vs Regular FD
A quick look at the differences of Tax Saving FDs and Regular FDs:
| Feature | Tax Saver FD | Regular FD |
| Tax Deduction | Up to ₹1.5 lakh (Sec 80C, under Old Tax regime) | Not eligible |
| Lock-in Period | 5 years | 7 days to 10 years |
| Premature Withdrawal | Not allowed | Allowed with a penalty |
| Loan Facility | Not available | Available (up to 90% of FD amount) |
| Tax on FD Interest | Fully taxable | Fully taxable |
This shows that the real advantage of Tax Saver FDs lies in the deduction benefit, while regular FDs score higher on flexibility.
Who Should Consider Tax Savings FDs?
Tax saving FD plans are suitable for:
- Salaried individuals or professionals with taxable income who need Section 80C deductions.
- Investors with low to moderate risk appetite who prefer secure returns.
- Senior citizens can benefit from slightly higher interest rates compared to regular depositors.
- First-time tax planners looking for simple, no-fuss options.
They may not be ideal for those who need quick access to funds or seek high growth returns.
Are They the Right FD Plan for Everyone?
Tax Saver FDs are attractive because they offer tax benefits and a stable return. They are suitable for individuals who prefer safety and certainty in their investments. Those with different financial goals may explore other options, but for steady growth with low risk, a Tax Saver FD can be a practical choice.
How to Open a Tax Saver FD?
Opening one is simple and involves the following steps:
Through Net Banking:
- Log in to your Net Banking account.
- Go to ‘Deposits’> ‘Fixed Deposit‘
- Click ‘Create FD’.
- Choose the FD type as Tax Saver FD.
- Enter the amount (minimum ₹10,000).
- The FD tenure of 5 years will automatically populate, then select the interest payout option.
- Click ‘Create FD’ to complete the process.
Through iMobile App:
- Log in to your account using your credentials
- Click on ‘Accounts & FD/RD’
- Next, select ‘Deposits’ and click ‘Create new FD’
- Enter the amount (min ₹10,000), select FD Type, Tenure of 5 years will autopopulate, select Interest Payout
- Then, select your Account for payment, agree to the terms and conditions and submit.
Offline Method
- Visit the nearest branch.
- Fill out the FD application form.
- Submit KYC documents and deposit amount.
Conclusion
A Tax Saving FD plan is a form of safe investment with the added benefit of earning tax savings, which can be a reasonable choice for investors with a low-risk profile. The Tax Saver FD provides predictable returns along with the advantage of deduction from taxable income under section 80C under the Old Tax regime, while the potential disadvantages of a 5 year lock-in and taxable interest must be taken into account.
Whether an investor should consider it depends on the investor’s preferences, investing style, risk appetites and needs for liquidity. If an investor is willing to forgo higher or riskier returns for safety and convenience in investing, a Tax Saver FD can be an adequate savings tool.
