Regardless of your risk tolerance, financial experts recommend creating a diversified financial portfolio. So, if you are a high-risk investor, you should not solely focus on the equity market and balance your portfolio with secure investments like a fixed deposit (FD). Conversely, if you are a low-risk investor, a fixed deposit account provides much-needed income stability and security to your financial portfolio. An FD allows you to securely save your fund with an authorized issuer for a specific duration and earn interest thereon. However, the returns of these fixed deposits are fully taxable as per your income tax bracket unless you choose a specially-designed tax-saver FD. In this article, you will know about Tax saver FD vs. Regular FD – What is the difference.
Tax-saving FDs are specifically created to help you save taxes while also allowing you to benefit from the interest earnings and security of capital as offered by a regular FD. However, there are significant differences between a regular FD and a tax-saver fixed deposit.
Here is an overview of the key differences between a tax-saver FD and a regular FD.
Tax-saver FD vs regular FD
|Basis||Tax-saver FD||Regular FD|
|Objective of investment||Primarily to save taxes while additionally earning interest like a regular fixed deposit.||Primarily to earn interest and enjoy the security of capital.|
|Lock-in period||A minimum lock-in period of five years to be eligible for applicable tax benefits.||No minimum lock-in period. The period of a regular FD depends on the bank or the financial institution.|
|Returns||Accrued interest is payable only at the expiry of the lock-in period.||Availability of staggering interest payments – monthly, quarterly, or yearly basis.|
|Tax benefits||Savings in this FD enjoy tax benefits under Section 80C of the Income Tax Act, 1961. The cumulative limit for 80C deduction is up to Rs. 1.5 lakhs. However, interest earned is taxable as regular income.||Savings and interest generated on the deposited sum are taxable as regular income tax rates applicable in the Income Tax Act, 1961.|
|Premature withdrawals||Premature withdrawals before the expiry of the lock-in period are not permissible.||Premature withdrawals are available after paying a nominal penalty, usually between 0.5% and 1% deduction of interest from the applicable interest rate for the FD.|
|Liquidity||Not liquid because termination or withdrawal of mutual funds is not available before the completion of the lock-in period.||Highly liquid because these fixed deposits can be liquidated either in full or in part, whenever required.|
|Availability of loans||Loans or overdrafts are not allowed against tax-saver FDs.||Loan and overdrafts against a regular fixed deposit are available easily. You can take up to 95% of the fixed deposit sum, subject to some rules.|
The main difference between the two types of fixed deposits is in terms of tax benefits and liquidity. Hence, if you want to invest primarily in saving taxes, you can opt for tax-saver FDs. However, if your goal is to earn a secure interest income while keeping your funds liquid, you can opt for a regular FD. Irrespective of the type of FD you choose, you should make an informed decision after carefully assessing the interest rates offered by different banks and financial institutions.
You can use the DIY smart Tata Capital Moneyfy app to invest in a range of fixed deposit options per your investment goals. The app allows you to make smart decisions by enabling you to understand your investment details. You can also use the Moneyfy app to monitor your investments and seek financial help from a relationship manager on call if required.