Tax-saver FDs: Here’s what public sector banks and private banks are offering

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Fixed deposits are evergreen and majority of Indians invest in FDs. Fixed deposits will always find a place in a conservative investor’s portfolio. While interest rates are not attractive in the existing low interest rate regime, a sense of guaranteed return at a fixed interest rate for a fixed period beats the lure of high interest rates. What if you also get tax deduction on your FD investment? A win-win in all sense for conservative investors. Many banks offer a five-year tax-saving FD which allows you to claim tax deduction under Section 80-C of Income-Tax Act, 1961. One can claim a maximum deduction of Rs 1.5 lakh per annum by investing in a tax-saving FD. Note that there will be a lock-in period of five years. Withdrawing money before five years will attract charges. Also note that only investment amount receive tax deduction. The interest earned each year will be taxable.

Currently, interest rates on tax-saver FDs are in the range of 5.20-5.50% in public sector banks. Canara Bank (5.5%), Union Bank (5.5%), State Bank of India (5.4%) and Punjab & Sind Bank (5.3%) are offering the highest rate on tax-saver FDs.

Private sector banks offer better interest rates on FDs. Currently, these are in the range of 5.60-6.50% for tax-saver FDs. DCB Bank (6.5%), RBL Bank (6.5%), Yes Bank (6.5%) and IndusInd Bank (6%) are among the ones offering the highest rates.

If you wish to exhaust the entire Section 80-C tax deduction limit (Rs 1.5 lakh) with tax-saver FDs, you may consider doing it each year. This way you can create a ladder of FDs in which after five years, each year one tax-saver FD will mature.

If you invest Rs 1.5 lakh in a tax-saver FD at an interest rate of 5.50 per cent in a public sector bank today, you will receive Rs 1.97 lakh after five years. Similarly, the same amount invested at 6.5% in a private sector bank will give you Rs 2.07 lakh after five years.

Tax-saver FDs are a great option for conservative investors who seek safer and tax-efficient investment options.