Tax free fixed incomeIf you want to save taxes but don’t like tax saver mutual funds because they are risky, then you can look at fixed income investments that will help you save on taxes. You can make reasonable returns on your investment with little risk to your capital. But each investment has its own pros and cons. Read on to find out.

Tax saving FD

This is perhaps the highest paying tax saving fixed income investment with a lower tenure of five years. The current rate for these Fixed Deposits (FD) ranges between 7 and 8%. The minimum amount differs. For example, for HDFC Bank tax saver FD the minimum amount is Rs 100 while it is Rs 10,000 for opening an ICICI Bank tax saver FD. The maximum amount is Rs 1.5 lakh.

For tax saver FDs, you cannot get back your money (even by paying a penalty) before the lock-in once you have invested in a tax saver FD. This is a major drawback and hence higher amounts of investment is not recommended. However, you can get monthly and quarterly interest payouts from the FD. If you don’t need the interest, you could go for the reinvestment option where interest is compounded quarterly and reinvested into the FD.

You get tax exemption on your savings under Section 80C of Income Tax Act. Only individuals and Hindu Undivided Families (HUFs) can invest in tax-saving FDs. The interest that you earn on the tax saving FD is subject to taxation just like any other FD. ‘Tax deduction at Source’ (TDS) will also be applicable if interest payable exceeds Rs 10,000 in a financial year. You cannot use the FD receipt as collateral. There is no overdraft facility or loan facility available on the tax saver FD.

Top 5 tax-saving bank FD rates

Name of the bank Interest rate (%) Rs. 10,000 will be … after 5 years
DCB Bank 7.65 Rs. 14,600
RBL Bank 7.50 Rs. 14,500
AU Small Finance bank 7.50 Rs. 14,500
Lakshmi Vilas Bank 7.25 Rs. 14,300
Yes Bank 7.25 Rs. 14,300

National Savings Certificate (NSC)

The five-year NSC offers an interest rate of 7.9%. Interest is compounded annually and is paid out at maturity. The 10-year NSC has been discontinued. The minimum investment is Rs 100 and there is no maximum limit. Rs. 10,000 invested in NSC will be Rs 14,625 after 5 years.

Both the amount invested, and the interest earned on your NSC are eligible for tax deduction under section 80C. Interest earned is taxable but the 5-year NSC would give your better returns than a 5-year post office deposit.

Public Provident Fund (PPF)

This is one of the best fixed income investments for saving taxes as it not only provides for a tax deduction under section 80C, the interest earned on your PPF is tax free. PPF is a must-have for all investors under 50 years of age, especially for those who are self-employed or not covered under any provident fund by their employers. The interest rate for PPF for this quarter is fixed at 7.9%.

The maximum investment limit for a financial year has been enhanced to Rs 1,50,000 from the earlier Rs 1,00,000. The minimum investment is a nominal Rs 500. The only drawback is that the investment tenure is a long 15 years. However, withdrawal is permissible every year from the 7th financial year from the year of opening the PPF account. Loan facility will be available from the third financial year. The unique point about PPF is that it cannot be attached to the accountholder’s assets under court decree order.

Sukanya Samriddhi Account

The current rate for the Sukanya Samriddhi account is 8.4%, which is the most among post office schemes. A parent/legal guardian can open the account in the name of girl child. The minimum investment is Rs 250 and the maximum investment is Rs 1.5 lakhs in a financial year. The account can be opened until the girl becomes 10 years and can be closed when the girls becomes 21 years old.

Maximum period up to which deposits can be made is 15 years from the date of opening of the account. Premature closure will be allowed after the girl child completes 18 years of age if the girl is married. Sukanya Samriddhi Yojana account enjoys the status of EEE (Exempt-Exempt-Exempt) and is eligible for deduction under section 80C of the Income Tax Act.

Senior Citizen Savings Scheme (SCSS)

This is ideal for those who are above 60 years and wish to save taxes. If you have taken voluntary retirement, you could invest from the age of 55. But if you are from the armed forces, you can invest at any time in SCSS. The minimum investment is just Rs 1000 and the interest rate offered is 8.6%, which is much more than bank FD rates. Investment under this scheme qualifies for the benefit under section 80C of the Income Tax Act.

The tenure is five years, which is much lower than that of PPF. After maturity, the account can be extended for three years. This needs to be done within one year of the maturity by giving an application form in the prescribed format. After extending the account, you can close the account at any time after expiry of one year of extension without any deduction.

Unlike the PPF, you can open multiple accounts. Premature withdrawal is possible after a year. The only negative with this investment is that the interest earned is taxable.

A comparison

Tax saving instrument Interest rate per annum (%) Interest taxable?
Bank FD 7-8 Yes
PPF 7.9 No
5 year NSC 7.9 Yes
Sukanya Samriddhi 8.4 No
SCSS 8.6 Yes

Link your tax investments like PPF to goals like child’s marriage or retirement. This would ensure that the funds are utilised properly on maturity. There will be a purpose for your investment, apart from saving taxes. You could invest or transfer investments in the name of your major children so that the entire tax burden doesn’t fall on you.

Kavya Balaji

Kavya Balaji is a senior writer with RupeeIQ.