An individual or HUF can invest in Tax saver fixed deposits of banks, not exceeding the aggregate limit of Rs.150000.00 u/s 80 (C) of IT in a financial year is eligible for tax relief. The ‘deposit’ can be opened in single name or joint names of an adult with a minor or in the joint names of two adults, payable to either or survivor. The Joint account cannot be opened for more than two people. In the case of joint accounts, only the first named person in the ‘Tax Saver Deposit’ can claim the tax rebate. Banks accept Tax Saver deposit for a minimum period of 5 years. Nomination facility is permitted in tax saver deposits.
Interest payable on tax saver deposit is normally equivalent to interest paid by the bank to its other types of deposits for the same tenure. At present, most of the banks’ deposit rates are around 7% for the period of 5 years. A Senior citizen gets little higher interest as all most all the commercial banks are offering 0.50% extra interest to the senior citizen of age 60 years and above. In tax saver deposits, the deposit can be placed under reinvestment deposit scheme where principal and compound interest payable at the time of maturity or in fixed deposits with interest payable to the depositor at half yearly or quarterly rest. Interest on tax saver deposits is accounted as interest income of the depositor and tax on the interest paid is deducted at source.
The disadvantage of tax saver deposit is that it can neither be closed prematurely nor a loan can be availed against it. This ‘deposit’ cannot be offered as collateral security for any advance.