Friday, 22 March 2019

Seniors can use 5-year bank FDs for saving tax

The recent increase in the interest rates on small savings schemes for the current quarter will sooner than later force banks to increase interest rates on fixed deposits. If that happens, FDs will become a more attractive investment product, specially for senior citizens. Let us see how.

Limited options for seniors to save tax

An individual or a Hindu Undivided Family (HUF) can invest up to Rs 1.50 lakh in tax-saving FDs and claim tax benefits, in the name of the individual himself or in the name of any member of the HUF.

A senior citizen’s risk taking ability is lesser compared to others, as he has retired from active earning life. Hence, investing in market linked products like Equity Linked Savings Scheme (ELSS) or Unit Linked Investment Plans (Ulips) are not the safest investments for them and hence, not advisable as tax-saving options under Section 80C for saving tax.

Besides, as senior citizens generally do not have school going children, nor do they have any running life insurance policy, they have only few avenues for claiming deduction under Section 80 C.

Their Employee Provident Fund (EPF) contributions also cease immediately after retirement, in case they were employed. In case of self-employed, the Public Provident Fund (PPF) account could have matured. It is also unlikely that they have opened a new PPF account, as the tenure is 15 years. Such a situation leaves senior citizens with only few investment products like Senior Citizen Saving Scheme (SCSS) and post office and bank fixed deposits to save tax.

There is a limit of Rs 15 lakh for investing in SCSS. In most cases the entire limit is used up immediately after retirement or witihin one or two years.

Benefit of tax-saving FDs

Since the interest rates on tax saving FDs are fixed at the time of making the deposits, it is not subject to any interest rate fluctuation during its tenure, unlike SCSS where interest rate is fixed only for one quarter at a time. Hence, it is less risky to that extent and can help senior citizens in planning their future cash flows more accurately.

With the expected increase in FDs rates they will become a good investment opportunity for senior citizens where they are offered higher rate of interest as compared to regular customers. With introduction of Section 80TTB granting a deduction for all bank interest incomes up to Rs 50,000 to resident senior citizens, bank FDS have certainly become more attractive and tax friendly to senior citizens. This is more true in case the limit of investment in senior citizen saving scheme has already been exhausted.

Conditions to keep in mind

The tax saving FD can either be made in a single name or in joint names of not more than two persons, one of whom can even be a minor. Deduction available for investment under Section 80 C can only be claimed by the first holder. Therefore, one must ensure that the person contributing the money is named as first holder of such FD.

These FDs cannot be pledge nor they be withdrawn before the completion five years. However, in case of death of first holder or the sole holder during currency of the term of deposit, the second holder, legal representative or nominee can request for premature withdrawal of deposit under this scheme. Hence, take your liquidity requirement into account before placing these FDs.

You can appoint nominee/s to receive the money in case of death during currency of the deposits. Please note that for deposit made for and on behalf of a minor, no nomination can be made. In case the nomination is made in favor of more than one person, all nominees will have to sign the necessary documents for claiming money from the bank.

PAN is mandatory for making these tax saving deposits. In case you misplace the deposits you need to follow a very elaborate process to claim the duplicate certificate so please be careful to preserve deposit receipt

Interest on these deposits is taxable and bank/post office will deduct appropriate tax on interest paid/credited.


  • Tax-saving options for senior citizens are limited given that they don’t have EPF and it is unlikely that they have home loan to repay  
  • Rates for tax-saving FDs are locked for the entire five-year tenure unlike Senior Citizen Savings Scheme where  rates are reset every quarter

The writer is a tax and investment expert


« »