For investors not comfortable investing in tax-saving bonds this season, tax-saving fixed deposits (FDs) offered by banks could be an interesting option to explore. With banks like State Bank of India (SBI) advertising heavily on their tax-saving deposits, there is renewed interest on this instrument, especially when interest rates are high.

Tax-saving FDs usually have a lock-in period of five years, and the investments in this instrument can be used to save tax under Section 80C. The prevailing interest rate on FDs of a five-year tenure applies to these tax-saving deposits also, making it a very attractive instrument for investment.

The tax-saving deposit scheme, introduced in 2006, mandates a maximum investment limit of Rs 1,00,000 per year, with no premature withdrawal facility. The interest payable is quarterly, half-yearly or annual, depending on the investor’s choice. These deposits cannot be used as a collateral to raise loans, unlike fixed deposits.

Most important of all, though these deposits help one save tax, the interest income earned on these deposits is taxable, just like regular fixed deposits.

“These are not a great investment idea, but not a bad one too either. Assuming the interest rate on these deposits is 10 per cent and the investor is in the 30 per cent tax bracket, the net returns on the investment works out to around 7 per cent, when a PPF (public provident fund) will give you about 8 per cent,” reasons Kartik Jhaveri, founder-director, Transcend Consulting.

It is a more appropriate product for investors in the 30 per cent tax bracket, compared with ones in the 10 per cent and the 20 per cent bracket, financial analysts admit. But any person in the top tax slab, would already be availing benefits through other tax-saving instruments like repayment of principal in a housing loan, life insurance premium or PPF that would suffice to exhaust the Rs 1,00,000 investment limit to avail benefits under Section 80C, they add.

“These could be suitable for slightly older employees who would have repaid their home loans, are not comfortable with equity options like ELSS, and do not want to get locked-up for long-term in PPF. For people averse to risks and want periodic liquidity, tax-saving deposits could be ideally suited,” reasons, Suresh Sadagopan, of Ladder7 Financial Advisories.

rsrividhya@mydigitalfc.com