Public sector banks have reduced interest rates on tax-saving fixed deposits (FDs) by 5-15 bps. For instance, Union Bank of India reduced the interest rate to 5.50 percent from 5.55 percent earlier. Similarly, Bank of India reduced the interest rate to 5.15 percent from 5.30 percent on a tax-saving FD.
Despite falling interest rates, you should invest a certain percentage of your portfolio in tax-saving FDs offering higher returns. The tax planning decisions should be taken wisely considering your financial goals. Investing in the volatile equity markets through equity-linked savings scheme (ELSS) is not recommended to risk-averse investors.
An investment in five-year tax-saving fixed deposits (FDs) offers relief 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, some banks offer you attractive interest rates.
Also read: RBL Bank, IndusInd Bank offer the highest interest rates on 1-year fixed deposits
Higher rates are offered by smaller private banks
Smaller private banks offer interest rates of up to 6.50 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, RBL Bank and Yes Bank offers 6.50 percent interest on tax-saving deposits followed by IndusInd Bank offering 6 percent interest on five years tax-saving FDs.
Ujjivan Small Finance Bank offers 6.75 percent interest on tax-saving FDs. It is followed by AU Small Finance Bank and Suryoday Small Finance Bank offering 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.
Among public-sector banks, the highest rate is 5.50 percent offered by the Union Bank of India and Canara Bank on a 5-year tax-saving FD. The leading public sector banks the State Bank of India (SBI) and Bank of Baroda are offering 5.40 percent and 5.25 percent interest on tax savings FDs.
Also read: Punjab and Sind Bank, Bank of India offer the lowest rates on gold loans
A sum of Rs 1.5 lakh invested in DCB Bank and Union Bank of India tax-saving FDs grows to Rs 2.07 lakh and 1.97 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 strong management and financials.
A note about the table
Data compiled as of July 21 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.