Tax Saving FD: A better investment option for the risk averse to earn high return and save taxes

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The tax-saving FD provides deductions under the Section 80C of the Income Tax Act, 1961.

There are a plethora of tax-saving options in the market that can enable a customer increase savings and preserve wealth, and the tax-saving fixed deposit is one of the safest bets. While other investment options such as ELSS and mutual funds are subject to market risks, fixed deposit is a low-risk product wherein the interest and the investment amount can be easily redeemed on maturity. Fixed deposits also provide high returns due to the power of compounding.

“Fixed deposits offer a predictable and relatively safe method of investment,” says Pranav Mishra, Head– Retail Liabilities Group, ICICI Bank. “People want to earn a substantial return on their hard-earned income without the fear of betting on market risks. Fixed deposits are a preferred option for customers due to their low-risk and high-return capabilities compared to other instruments.”

Praveen Kutty, Head of Retail and SME Banking, DCB Bank, says, “The tax-saving fixed deposit is amongst the most convenient means to enjoy attractive returns and the benefit of tax saving. It also inculcates the habit of saving, especially among the young professionals as well as those wishing to save for special goals. The tax-saving benefit varies as per the individual’s earnings and applicable income tax rules. Therefore, a person making a fixed deposit must refer to professional experts in financial matters.”

The tax-saving FD provides deductions under the Section 80C of the Income Tax Act, 1961. The investor can claim deductions of up to Rs 1.5 lakh in a financial year with this option. The total investment is deducted from one’s gross total income to reach the taxable income.

Further, as a debt instrument, it is a much safer option than an equity-based tax-saving scheme such as ELSS as the returns are guaranteed by the bank and fixed for the tenure. Tax-saving fixed deposits enable the investors to access tax benefits with one of the smallest lock-in requirements of 5 years and a periodic interest payout feature. A five-year National Saving Certification (NSC) offers a similar tax benefit but without the interest payout option. In the current market, tax-saving FDs are more liquid and safe compared to other debt instruments.

Changing market dynamics

Banks are increasingly adopting more analytical and technological capabilities including artificial intelligence (AI), machine learning (ML), voice and chatbots, and more to create tech-disruptive models, improve retention rates, and enhance operational efficiency. Investors are switching to mobile applications to access core and value-added services, and the applications, in turn, offer banks the opportunity to access underserved and existing markets. Some banks are offering the best in the industry digital solutions for banking needs through their mobile banking application and other services. An investor can now conveniently access the account, open a fixed deposit, and carry out safe and secure banking from the mobile phone.

“The constant development in the technological capabilities with voice assistants, the blockchain, and AI have led banks to capture the mindshare of their customers,” says Mishra, adding that “obtaining a fixed deposit account is now possible at the touch of a finger on the mobile/internet banking application in a few clicks.”

Features of a tax-saving FD option

The investor can choose between a traditional plan that provides interest on a quarterly or monthly basis or a reinvestment plan that offers interest compounded quarterly and reinvested with the principal. A tax-saving FD from commercial banks such as SBI, ICICI Bank, HDFC Bank and DCB Bank currently offers customers the ability to earn up to 7.75 per cent interest rate on the five-year investment.

Further, the investor can avoid TDS deduction on the interest amount with form 15G (or form 15H for senior citizens). The Interim Budget 2019 had also proposed an increase in the TDS limit from Rs 10,000 to Rs 40,000- a potential benefit for the next financial year.

As a debt investment, the tax-saving FD offers safety and convenience with guaranteed returns and fixed terms. It has one of the smallest lock-in periods (five years) when compared to other debt instruments with the Section 80C benefit, including NSC. The five-year tax-saving fixed deposit option can also be a convenient and quick way to avail the Section 80C benefits. A customer can apply online for quick investment with an opportunity to instantaneously generate a certificate to avail tax benefits.