Tax planning decisions should be taken wisely, considering your financial goals. With the second wave of the COVID-19 pandemic and lockdowns being announced in multiple states of India, the equity market is volatile. In this situation, investments in equity linked savings scheme (ELSS) for tax-saving purpose may entail risks.
An investment in five-year tax-saving fixed deposits (FDs) offers relief to investors in this scenario. Also, investors prefer FDs, as returns are certain. Those in the lower tax brackets will find bank FDs more attractive.
By investing in these FDs, you can take the section 80C tax deduction benefit. Investments up to Rs 1.5 lakh can be claimed for tax deduction under section 80C of the income tax act. Tax-saving FDs have a lock-in period of five years and premature withdrawals are not allowed.
Even though bank FD rates have fallen to low levels, there are some banks that offer you attractive interest rates.
Also read: The best fixed income investments in a low interest rate regime
Smaller private banks offer higher interest rates
Smaller private banks offer interest rates of up to 6.75 percent on tax-saving FDs, according to data compiled by BankBazaar. These interest rates on tax-saving FDs are higher compared to leading public sector banks.
DCB Bank and Yes Bank offers 6.75 percent interest on tax-saving deposits followed by RBL Bank offering 6.6 percent interest on five years tax-saving FDs.
Suryoday Small Finance Bank offers 7.25 percent interest on tax-saving FDs. It is followed by Ujjivan Small Finance Bank and AU Small Finance Bank offering 6.75 percent and 6.25 percent interest respectively on these FDs. The interest rates offered by small finance banks are higher compared to leading private banks. The foreign banks such as Deutsche Bank and Citi Bank offer 6.25 percent and 3.50 percent interest respectively on tax-saving FDs.
Private Banks such as Axis Bank, ICICI Bank and HDFC Bank offer 5.75 percent, 5.35 percent and 5.30 percent interest respectively on tax-saving FDs.
The highest rate offered by a public-sector bank on a 5-year tax-saving FD is Union Bank of India that offers 5.55 percent interest, followed by Canara Bank and State Bank of India (SBI) offering 5.50 percent and 5.40 percent interest on tax savings FDs respectively. Bank of Baroda is offering 5.25 percent interest on tax-saving FDs.
Also read: Bank of Baroda, Kotak Mahindra Bank offer the lowest interest rates on home loans
A sum of Rs 1.5 lakh invested in DCB Bank and Union Bank of India tax-saving FDs grows to Rs 2.10 lakh and 1.98 lakh, respectively, after five years.
Smaller private banks and small finance banks that have a low customer base typically offer higher rates to attract customers and depositors. That’s why government-owned banks offer lower rates. Just because a bank is offering you a high rate, doesn’t mean you should necessarily invest in it. Go for higher rates, but also go for reasonably larger banks with a strong management and financials.
A note about the table
Data compiled as on May 12 2021 from respective banks' website. BankBazaar has accounted for FDs belonging to only those foreign, private, small and public sector banks that are listed on the stock exchanges. Banks, for which data is not available on their respective websites, were dropped. These rates are only of tax-saving five-year FDs for non-senior citizens.