Since tax season can be stressful, most investors look for ways to lower their tax obligations. To this end, tax-saving fixed deposits (FDs) can be quite useful. They provide guaranteed returns and deductions under Section 80C of the Income Tax Act, 1961. 

Here’s a look into some strategies that could help maximise the effectiveness of tax-saving FDs in 2024. These could also aid in integrating FDs easily into your overall financial planning. 

Strategies for Tax-saving FDs in 2024

Now, let’s explore some innovative strategies to leverage tax-saving FDs in 2024:

•  Plan Your Investments Early

The financial year in India runs from April 1st to March 31st. Make sufficient tax-saving FD investments early in the financial year to maximise the utilisation of the ₹1.5 Lakhs deduction limit under Section 80C. This allows you to claim the full deduction benefit and potentially reduce your tax liability for the entire year.

• Compare Interest Rates and Choose Wisely

Don’t settle for the first bank you come across. Research and compare the interest rates offered by different banks and financial institutions for tax-saving FDs. Even a slight difference in interest rates can translate into a significant gain over the 5-year lock-in period. Utilise online resources or financial comparison websites to streamline this process.

• Diversify Your Portfolio Beyond Tax-saving FDs

To create a well-rounded portfolio that caters to both tax savings and long-term goals, explore options like Equity Linked Savings Schemes (ELSS), Public Provident Fund (PPF), National Pension System (NPS), or Unit Linked Insurance Plans (ULIPs). Remember, each option has its own risk profile and return potential, so conduct your research before investing.

• Maximise Returns with Reinvestment (if Applicable)

Some banks/NBFCs offer the option to automatically reinvest the interest earned on your tax-saving FD. This strategy, known as compounding, allows your interest to grow on fixedaccumulated interest, potentially leading to a higher overall maturity amount. This can be a good option for long-term wealth creation if you don’t need regular access to the interest earned.

• Align FD Maturity with Upcoming Financial Goals

If you plan on opting for a tax-saver FD, then consider aligning the maturity date with an upcoming financial goal. For instance, if you are planning a child’s college education in around 5 years, then investing in a tax-saving FD with a 5-year maturity date can be beneficial. This not only ensures that the funds are readily available when needed without breaking the investment prematurely but you also get the relevant tax benefits.

• Stay Updated on Tax Laws and Regulations

Tax laws and regulations can change periodically. It’s crucial to stay updated on any changes that might impact the tax benefits associated with tax-saving FDs or other investment options. This ensures you are utilising the most effective strategies for your financial situation.

Features of Tax-saver FDs

The following are the core features of a tax-saving FD:

• Lock-in Period: Tax-saving FDs come with a mandatory lock-in period of five years. This means your invested amount remains inaccessible during this timeframe.
• Tax Deduction: Investments up to ₹1.5 Lakhs in a tax-saving FD qualify for a deduction under Section 80C. This could potentially lower your taxable income.
• Interest Rates: Tax-saving FDs typically offer slightly lower interest rates compared to regular FDs. However, the tax benefit may outweigh this difference.

Limitations of Tax-saving FDs

While tax savings are a key advantage, remember that tax-saving FDs have limitations:

• Lower Returns: Compared to some equity-based investments, tax-saving FDs offer lower potential returns.
• Limited Liquidity: The five-year lock-in period restricts access to your invested funds. Ensure you have an emergency fund in place to cover unforeseen expenses.
• Inflation Risk: Over time, inflation can erode the purchasing power of your returns. Consider this factor when choosing the tenor of your FD.

Ways to Optimise Your Tax-saving FDs

You can employ the following strategies to maximise the effectiveness of tax-saving FDs:

• Match Maturity to Goals: Align the maturity of your FD with your financial goals. If saving for a short-term objective like a down payment, consider a shorter-term FD. Conversely, for long-term goals like retirement, a longer-term FD can benefit from potential compounding interest.
• Explore Interest Rate Options: Research and compare interest rates offered by various banks and NBFCs. Senior citizens, in particular, can benefit from exploring issuers offering higher rates specifically for their age group.
• Consider Reinvestment (if Applicable): If your primary goal is long-term wealth creation and you don’t require regular access to the interest earned, opt for the reinvestment option. This allows your interest to compound over time, potentially leading to a significantly higher maturity amount.

Consulting a financial advisor can be highly beneficial in identifying the right mix of investments that aligns with your unique needs. By strategically integrating tax-saving FDs into your overall financial plan, you can not only save on taxes but also work towards a secure future.