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In India, Fixed deposits (FDs) are one of the most popular saving instruments. All leading banks offer fixed deposits.
Fixed deposits offer a higher rate of interest when compared to savings accounts. Unlike saving accounts, money invested in fixed deposits is locked in for a certain period. You can withdraw the money from a fixed deposit only after the term ends. Fixed deposits are available for a term of up to 10 years.
Example 1: ICICI Bank offers fixed deposits for different terms ranging from 7 days to 10 years. Depending on the term, interest rates are in the range of 4.50% to 8.75%. For senior citizens, interest rates are in the range of 5% to 9.50%. You can open a fixed deposit account at a branch, through phone or online.
Within fixed deposits, there is a category of products called tax-saving fixed deposits. Investments in tax-saving fixed deposits of up to ₹150,000 per annum can be deducted from taxable income. However, for a fixed deposit to qualify as a tax-saving fixed deposit, it has to meet certain criteria as listed below.
Example 2: Let's look at a tax-saving fixed deposit offered by ICICI. You can invest any amount between ₹10,000 and ₹100,000 for a period of 5 years. Interest rate is 8.75% p.a. The fixed deposit does not allow premature withdrawal or any auto-renewal. Also, no loan can be taken against this fixed deposit.
Example 3: Bank of India offers Star Sunidhi Tax-Saving Deposit Scheme for individuals and HUFs. Minimum deposit is ₹10,000, and maximum deposit is ₹150,000 per annum. Maximum term is 10 years. Interest rate is similar to Bank of India's other term deposits for 5 years. Premature withdrawal is not allowed, and no advance is available against this deposit for 5 years. And like other tax-saving fixed deposits, this fixed deposit cannot be used to get a loan.
Example 4: Canara Bank offers Canara Tax Saver scheme with an interest rate of 8.75% p.a. The minimum deposit amount is ₹100, and the maximum amount is ₹1,00,000 for an individual. The scheme does not allow premature withdrawal, and it cannot be used as a collateral for securing loans or advances. Canara Tax Saver Scheme is available to individuals and HUFs.
Note that you have to pay tax on any interest earned on tax-saving fixed deposits, just like regular fixed deposits.
Use our Indian Tax Calculator to check how tax-saving fixed deposits impact your taxes.