Tax-Saver Fixed Deposits (FDs): Should Seniors Invest In Them?

Tax-saver fixed deposit (FD) schemes provide tax benefits with guaranteed returns and are popular among senior citizens. Like the equity-linked savings schemes (ELSS) in mutual funds, these FDs have the shortest maturity period. However, there is a catch: these FDs have a minimum five-year lock-in and a maximum of 10 years. Premature withdrawal is not allowed except when the accountholder is dead. Investors can claim tax deductions of up to Rs 1.5 lakh under section 80C of the Income-tax Act, 1961, in a financial year for deposits. However, the interest income from a tax-saver FD is taxable as per the accountholder’s income slab, and it must be reported under the heading ‘Income from other sources.‘ Banks can deduct the tax at source (TDS) if the interest income is more than Rs 50,000 annually for senior citizens. Note that TDS is deducted when the interest amount exceeds the prescribed limit, not at the time of FD maturity. Also Read: Bonds Vs. Fixed Deposits: Where Should Senior Citizens Invest? The maximum investment amount in a tax-saver FD is Rs 1.5 lakh. The minimum amount may vary from Rs 100-1,000 from one bank to another. For example, SBI’s minimum amount requirement is Rs 1,000, whereas HDFC bank’s is Rs 100, according to their websites. Like other FD and savings bank accounts, tax-saver FDs are secured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) rules for a maximum of Rs 5 lakh.  

Should Seniors Invest In These FDs?

It depends on the individual’s requirement. However, they should consider the following points:   No Premature Withdrawal: Investors can opt for FDs with premature withdrawal features if their goal is only to earn guaranteed income and not save tax. This will keep the investments liquid, and they can withdraw them during an emergency. Tax-saver FDs do not offer a premature withdrawal facility, so one may substitute them with other suitable liquid products. Also Read: Govt Launches ‘Chakshu’ Facility To Protect Citizens, Facilitates Reporting Of Fraud Calls Limitation On Maximum Investment Amount: Tax-saver FDs allow a maximum investment of Rs 1.5 lakh. So, if the tax benefit is the only consideration, in that case, investors will have other options under Section 80C, such as ELSS, home loans, employees’ provident fund (EPF), Public Provident Fund (PPF), National Pension System (NPS), Senior Citizen Savings Scheme (SCSS), etc. So, carefully choose the best instrument, considering tax and other benefits. No Loan Facility: Tax-saver FDs cannot be used as collateral for loans. Although banks offer loans against FDs, they do not provide loans against tax-saver FDs. The absence of loans and premature withdrawal facilities make the tax-saver FDs less useful in emergencies. Depending on the bank, interest rates on tax-saver FDs range from 6 to 7.75 per cent. So, should seniors invest in them before the financial year ends? Experts say that as the interest rates may have peaked, it could be the right time to invest in FDs for the long term. Some experts believe the Reserve Bank of India (RBI) might start cutting rates by the end of this year.