DCB, IndusInd and Yes Banks offer the best rates on tax-saving deposits

Investing in tax-saving fixed deposits allows you to take the section 80C tax deduction benefit. Investments up to Rs 1.5 lakh can be claimed for tax deduction under section 80C. Tax-saving FDs have a lock-in period of five years and premature withdrawals are not allowed.

The equity markets are all time high and valuations seems stretched. Though interest rates are low, some banks offer attractive tax-saving FDs. Also, investors prefer fixed deposits (FDs) as returns are certain. Those in the lower tax brackets find bank FDs particularly attractive as interest it fully taxable.

Smaller private banks offer interest rates of up to 6.95 per cent 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 tops the chart with 6.95 per cent interest, followed by private banks such as IndusInd Bank and Yes Bank offering 6.75 per cent interest on five years tax-saving FDs.

AU Small Finance Bank and Ujjivan Small Finance Bank offer 6.50 per cent and 5.80 per cent interest respectively on tax-saving FDs. The interest rates offered by small finance banks are higher compared to leading private banks.

Private Banks such as Axis Bank, ICICI Bank and HDFC Bank offer 5.50 per cent, 5.35 per cent and 5.30 per cent 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 per cent interest, followed by Canara Bank and State Bank of India (SBI) offering 5.50 per cent and 5.40 per cent interest on tax savings FDs respectively. Bank of Baroda is offering 5.25 per cent 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 2.12 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.

Data compiled as on December 23 2020 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.