Many individuals prefer investing in tax saving fixed deposits as they are less riskier as compared to ELSS mutual funds. Further, the tax saving FDs offer fixed returns. However, there are three reasons why individuals may be better off by giving tax saving FDs a miss this year. Read on to know all about it.
Many taxpayers invest in a tax-saving FD as it is considered safer than equity investments via equity-linked saving scheme (ELSS) mutual funds. Further, FD returns are fixed and not linked to market fluctuations. However, taxpayers may be better off exploring options such as National Saving Certificates ( NSC ), post office time deposits and Public Provident Fund ( PPF ) to save income tax this financial year, instead of using tax-saving FDs.
Here are some reasons to back this assertion.
Interest rate for 5-year FD yet to peak
The Reserve Bank of India ( RBI ) has been raising key policy rates since May 2022. Till the end of financial year 2022-23 (March 31, 2023), the central bank has hiked the repo rate by 250 basis points or 2.50%. At the start of the financial year, the repo rate was 4%; currently, it is 6.50%.
With the increase in repo rate, banks also started raising interest rates on fixed deposits. They have launched several special deposit schemes as well to attract FD investors. However, the interest rate of tax-saving FDs is still not the highest.
The RBI’s bulletin for March 2023 said that between May 2022 and February 2023, the medium term deposit rates hiked by 82 basis points (0.82%) for retail deposits for new investments. Only 33% of the rate hike of 2.50% has been passed on to the FD investors.
Most of the interest rate hikes have been passed on only to FDs with short-term maturities. Many banks are offering the highest interest rate on tenure between one and three years. For a bank FD to be a tax-saver, its tenure must be of 5 years. Currently, the interest rate on tax-saving FDs is lower than the highest interest rate offered by banks on other tenures of FD.
For instance, State Bank of India ( SBI ) is offering the highest interest of 7% on an FD with tenure of 2 years to less than 3 years. However, the interest rate on its 5-year FD is 6.50%, which is 0.50% lower than its highest interest rate.
Similarly, HDFC Bank is offering the highest interest rate of 7.10% on tenure of 15 months but less than 18 months. However, the interest rate for its 5-year tax-saving FD is 7%.
ICICI Bank is offering the highest interest rate of 7.10% for two tenures – 15 months but less than 18 months and 18 months to two years. However, the bank is offering 7% for its tax-saving FD.
Bank of Baroda is offering 6.25% on its tax-saving FD. However, the bank’s highest FD interest rate is 6.75% for tenure between 1 year and up to 3 years.
Generally, the interest rate on fixed deposits with longer tenures such as 5 years and above tends to be highest when compared with short-term and medium-term tenure. One can say that long-term FD rates are yet to peak. Hence, this may not be an opportune moment to book long-term tax-saving FDs in banks. Some bank FDs offer above 7% and are worth considering.
Though some major banks are offering an interest rate of 7% on tax-saving FDs, it is important to check the interest rate being offered by all major banks. This is to ensure that you do not lose out on higher interest rates while making an investment.
Do note that for senior citizens, banks are already offering a higher interest rate. For instance, SBI is offering an interest rate of 7% on 5-year tax-saving FDs. Similarly, ICICI Bank is offering 7.50% on tax-saving FDs. Hence, senior citizens may invest in tax-saving FDs to save on income tax.
Less risky alternatives are offering similar or higher return
A tax-saving FD with a bank has a tenure of five years. To save income tax, individuals have an option to invest in a 5-year post office term deposit and NSC. Both have a tenure of five years. Currently, both of them offer an interest rate of 7%.
Do note that a post office time deposit (POTD) and NSC are safer than bank tax-saving FD. This is because these two have a sovereign backing. Hence, any amount invested by an individual and the interest are considered completely safe – without any monetary limit. However, in case of a bank FD, an individual’s deposits and interest are insured up to Rs 5 lakh. Deposits include money held in savings accounts, fixed deposits, recurring deposits or any other deposit held with the bank.
Also Read: How to get cover of Rs 65 lakh on bank deposits
So, if an individual wants to save income tax, they can consider invest in either a 5-year POTD or NSC instead of a bank tax-saving FDs that offers a return of 7% or less. The interest rate offered by these small saving schemes is similar to what some prominent banks are offering on their tax-saving FDs; and there is a higher degree of safety.
Rinju Abraham, Vice-President, Scripbox, says, ” Bank fixed deposits currently offer slightly lower interest rates than post office term deposits. The 5-year term deposit at the post office is eligible for tax benefits under Section 80C and the implied safety on such deposits is usually high.”
An individual can also consider PPF to save tax if tenure is not an issue. The interest earned on a PPF investment and the maturity amount are exempted from tax.
Interest rate risk appears higher with bank FD
Lastly, if an investment is done at the current interest rate level, the interest rate will not change for five years. So, if you lock-in your investment in a bank tax-saving FD at a much lower rate of around 6.5%, and later the bank hikes the interest rate to 7% or above for long-term FD tenure, your tax-saving FD will continue to earn a lower interest rate. However, if you opt for a small saving scheme with interest at 7% or above, the chances are that you might not miss out on a lot of interest in case of a rate hike at a later stage.
Interest rates of bank tax saving FDs were taken from bank websites on March 16, 2023.
Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp. click here!
- Front Page
- Pure Politics
- ET Markets
Fed Hikes Rates by 25bps, Signals One More on Cards
The Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two US banks.FM Calls State-owned Lenders’ Meet Amid Global Banking Crisis
Finance minister Nirmala Sitharaman has called a special meeting of state-run lenders later this week to seek their views on heightened global concerns over the banking system’s vulnerability due to monetary tightening.With Great Ecommerce Comes Great Responsibility for Online Platforms
The consumer affairs ministry is working on tightening ecommerce rules to make online retail platforms liable for fraud committed by sellers and attaching “fallback liability” to their role as intermediaries, said a senior official.
Read More News on
(Your legal guide on estate planning, inheritance, will and more.)
Download The Economic Times News App to get Daily Market Updates & Live Business News.
… more less
ETPrime stories of the day
8 mins read
5 mins read
3 mins read