It’s that time of the year when salaried employees scramble to make last-minute tax-saving investments for the financial year 2020-21. The investment decisions should be taken considering your financial goals. However, it is not too late, as you have a couple of months’ time to plan for your tax-saving investments and avoid a last-minute rush.
The equity markets are volatile and valuations seem excessive. Lump-sum investments in equity linked savings scheme (ELSS) for tax-saving may be risky. An investment in five-year tax-saving fixed deposits (FDs) offers solace to investors in this scenario. Also, investors prefer fixed deposits (FDs) as returns are certain. Those in the lower tax brackets 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.
Higher interest rates are offered by smaller private banks
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 tops the chart with 6.75 percent interest, followed by IndusInd Bank offering 6.50 percent interest on five years tax-saving FDs.
AU Small Finance Bank and Ujjivan Small Finance Bank offer 6.50 percent and 5.80 percent interest respectively on tax-saving FDs. The interest rates offered by small finance banks are higher compared to leading private banks. The foreign banks such as DBS Bank and Deutsche Bank offer 5.50 percent interest on tax-saving FDs.
Private Banks such as Axis Bank, ICICI Bank and HDFC Bank offer 5.50 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.
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 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 January 27 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.