The diminishing popularity of fixed deposits due to constant decrease in fixed deposit interest rates, got a boost when the Indian government announced in 2006 that, bank fixed deposits booked by an individual/HUF for 5 years and up to Rs. One Lac or Rs. 100,00/- will be eligible for exemption. This exemption would be under section 80C of the income tax act 1961, provided the investor makes necessary declarations. This is the same section where we take exemption for life insurance policies, Mutual Funds, etc. The fixed deposits which were giving interest rates up to 14% or more a decade back have recently slump to around 10%. However, as soon as the announcement from income tax department came, fixed deposit again became darling of the investors.

Salient features of tax saver fixed deposits

The fixed deposits can be purchase for a minimum amount of Rs. 100, and then in multiples of Rs. 100. The maximum amount eligible under a tax saver fixed deposit is Rs. 100,000 for a financial year. You would be able to claim a maximum of Rs. One lac as a tax deduction. This fixed deposit is locked for a 5 year period and money can't be withdrawn nor can it be pledged for any reason during this tenure. Though the interest rates are varying very frequently and can change in the future, the currently prevailing interest rates on a tax saver fixed deposit is around 8.25% for normal citizens and 8.75% for senior citizens.

This tax saver fixed deposits do not have the sweep-in facility. It means that this fixed deposit cannot be linked to a savings account and the surplus funds available under the savings account cannot be automatically invested in this fixed deposit. In addition to it there is no overdraft facility available on the tax saver fixed deposit. As this instrument of saving money is special due to its tax saving status, banks do not extend relationship benefits on the tax saver fixed deposit.

What if two people invested in the same tax saver fixed deposit?

In case two people invest in a tax saver fixed deposit, and become joint holders of the same, the tax benefits under the section 80C of income tax act will be available to the 1st holder. The second holder won't be able to enjoy any tax deduction benefits on such a jointly held tax saver fixed deposit. Anyone who is an Indian resident or Hindu undivided families (HUF) can apply for a 5 year tax saving fixed deposit.

Interest rates on tax saving fixed deposit in India

The interest rates on tax saving fixed deposits are generally calculated on a quarterly basis and the interest is reinvested into the fixed deposit. So, after every quarter the principal increases by an amount earned as the interest in the last quarter. If the tax saver fixed deposit calculates interest rates on a monthly basis the rate of interest offered on such fixed deposits will be considerably lower than those calculated on a quarterly basis.

Tax savings fixed deposits are the easiest tax savings vehicles for section 80C. They might not be the best investment options for your financial growth when compared with insurance policies and tax saving mutual funds - but are simple, fast and give you peace of mind.