Difference between Tax Saver Fixed Deposit and Regular Fixed Deposit

A fixed deposit is a time-tested investment avenue. It is simple to understand, easy to invest in, and offers the flexibility to time its maturity with your financial goals. Whether you are looking to save the down payment of a home or car in the near term or looking to build a corpus for children’s education or your own retirement, an FD can serve all needs. It brings stability to your portfolio, allows for compounding wealth and sometimes even save tax.

However, to avail of tax benefits on your FD, you will have to make a specific deposit designated as so. Let’s take a peek at what is tax saver fixed deposit and how it is different from a standard term deposit.

Tax advantage
 

As the name suggests, the single biggest differentiator is the tax treatment for both deposits. Interest income from standard fixed deposits is added to your gross income and taxed at the slab rate applicable to you. If the total interest earned through all FD/RD exceeds Rs 40,000 in a financial year (Rs 50,000 for senior citizens), the interest income will also be subject to Tax Deducted at Source (TDS).

Investing in tax saving fixed deposits awards you a tax deduction under Section 80C of the IT Act. These deposits are defined as ETE (Exempt-Taxed-Exempt) investments for tax purposes. Where the capital investment is Exempt from tax, the interest earned is Taxable each year till maturity, and the final redemption value of capital and interest earned is again Exempt from tax.  The TDS provisions also apply to interest on Tax Saver FDs

Capital investment
 

There is no restriction on the amount you can invest in a standard fixed deposit. Based on your investment goals and asset allocation strategy, you can invest as little or as much as you want. 

The deductible benefit from tax saver fixed deposits is only valid for a maximum investment of up to Rs 1.5 lakh per annum, inclusive of all other investments claimed under Section 80C. You can invest more if you want, but the tax benefit will not be available for higher amounts. Most private banks require a minimum deposit of Rs 50,000 under the tax saving scheme.

Tenure and liquidity
 

In general, the tenure for regular FD schemes varies from 7 or 15 days going all the way up to 10 years. You are free to choose the duration based on your goals. On maturity, you can withdraw or reinvest your capital with a new tenure and interest rate. During the tenure of the deposit, you can also choose to partially or fully liquidate the deposit, if required. Some banks may levy a foreclosure charge, but there are no restrictions on pre-mature withdrawals.

Tax saving FDs and other 80C instruments have been introduced by the government to promote long-term savings. Hence all the instruments have a longer investment tenure. The duration for tax saving deposits is fixed at 5 years. You cannot make partial or full withdrawals on this deposit until the investment matures. There is no option for reinvestment either. Any new deposits you make under tax-saving FDs are specific to the financial year of investment.

Earnings and payment
 

Standard fixed deposit rates vary depending on the tenure and amount you invest. Generally, longer the tenure, the higher the interest rates are for retail deposits up to Rs 1 crore. The same interest rates, however, cannot be carried forward. Any reinvestment of the deposit will happen at the prevailing interest rates specified by the bank.

You can decide the frequency of interest credit. You can choose to get the interest credit on a monthly, quarterly, half-yearly or annual basis depending on what your bank offers. You can also select a reinvestment option where the interest is not paid out, but added to your capital for higher compounding.

There are no variable options on interest rates for tax saving deposits considering there is no choice in tenure. Each bank will give you only one option for a tax saving FD with a specified interest rate. However, the interest can vary from one bank to another. Bearing in mind you will be investing for the long-term, it is suggested to check the interest rates offered by different banks so that you can maximise your returns over the 5-year tenure.

The interest on tax savings deposits is not paid out till the deposit is active. The entire invested capital, along with the accrued interest (less TDS deducted each year), is paid out either in lump sum at the time of maturity or every quarter or every month in accordance with the regulatory guidelines for payment of interest on the term deposit. It is important to note that where the interest is paid by the scheduled bank in lump sum at the time of maturity, the term deposit receipt shall bear the yearly rate of interest on the term deposit.

These deposits can be liquidated and closed only at the time of their maturity or in case of death of the primary holder.

Other features and options
 

Most private banks allow customers to avail of loans or overdraft facilities on the deposits made with the bank. The credit is usually offered up to 80% - 90% of the deposit value and at a marginally higher interest rate than what is being given on the FD. This allows the bank’s customers to make emergency borrowings without having to place collateral or pay higher interest rates as with personal or business loans.

No such feature is available with tax saving deposits. You cannot take loans or overdrafts against these deposits, nor can they be put up as a lien to a third-party lender.

To sum it up

A fixed deposit is a versatile and safe investment option. It allows you to match your investment tenure to your goal, no matter how short or long it is. Tax saving FDs also help you bring down your taxable income and compound your investment till maturity.

IDFC FIRST Bank offers a host of deposit options with the option to receive the interest credit on a monthly basis.

Track all your accounts and banking needs with the IDFC FIRST Banking App.

To know the prevailing deposit rates and see how much interest you can earn, use IDFC FIRST Bank’s customisable interest rate calculator.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.