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Fixed deposits: Tax-saving fixed deposits (FDs) enable senior citizens to avail a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961. The interest earned on fixed deposits typically incurs taxes. However, senior citizens have the opportunity to generate tax-exempt returns from tax-saving FDs. To understand how it works and how much a senior citizen needs to invest for a full tax-exempt return, here are the details.
Whether it’s a cumulative FD where interest is paid at maturity or a non-cumulative FD where interest is paid periodically, tax is applicable on the interest income of your fixed deposit every financial year.This interest is taxable according to the investor’s tax bracket, with certain exemptions provided to senior citizens.
What are the tax rules for senior citizens regarding FDs?
Senior citizens aged 60 or older can claim a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961. Additionally, they can avail a deduction of up to Rs 50,000 annually from their gross total income under Section 80TTB of the Income-tax Act, 1961. This deduction also applies to the interest earned on tax-saving FDs.
It is important to note that the Rs 50,000 threshold per financial year applies to the total interest income from bank deposits (savings or fixed), post office deposits, and deposits in cooperative societies involved in banking activities, such as cooperative land mortgage banks or cooperative land development banks.
To make the most of Section 80TTB, senior citizens need to invest in such a way that their total interest income from fixed deposits remains close to the limit of Rs 50,000 in a financial year. However, for many senior citizens who rely on interest income for their living, the limit of Rs 50,000 may not be sufficient.
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How much should a senior citizen invest in tax-saving FD for a tax-free return?
To achieve a tax-free return, senior citizens can invest up to Rs 1.5 lakh in a tax-saving FD. Instead of putting all the money into one account, they can divide it into small parts and invest in cumulative tax-saving FDs every year. This strategy ensures that the return is fully exempted from tax.
Here’s how it works: Tax-saving FDs typically have a fixed five-year tenure. According to experts, when booked every successive year, they mature every year after a five-year interval. This approach is similar to fixed deposit laddering, which helps mitigate the risk of all fixed deposits maturing at the same time.
It’s important to invest in a manner that ensures your total interest income from all five fixed deposits doesn’t exceed the Rs 50,000 annual exemption limit under Section 80TTB. For calculation purposes, let’s assume a constant interest rate of 7% for the upcoming years.
Let’s consider an example: If a senior citizen invests Rs 1,20,546 at a 7% interest rate in a tax-saving FD, compounded quarterly, he will earn Rs 8,662 interest by the end of the first year. Since this interest falls within the Rs 50,000 threshold, he doesn’t need to pay tax on it, and banks won’t deduct any tax at source (TDS) as it’s below the TDS threshold for senior citizens.
In the second year, the senior citizen reinvests Rs 1,29,209 (which includes the first year’s interest and initial principal) in the FD. Additionally, he opens another fixed deposit of the same amount at a 7% interest rate per annum. By the end of the second year, he earned a return of Rs 17,947 from both fixed deposits. He can claim a tax deduction on this income under Section 80TTB, and no TDS will be levied as the interest income from the fixed deposit remains within Rs 50,000.
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Investing Rs 1,20,546 each year in an FD at a 7% interest rate for five years will guarantee a tax-free return.

Principal Amount Rs 1,20,546 Interest 7.00%
Year New Principal Investment (Rs) Balance at the Beginning of the Year (Rs) Interest Earned During the Year (Rs)
Balance at the End of the Year (Rs)
Maturity Amount (Rs) Taken Out
1 1,20,546 1,20,546 8,662 1,29,209
2 1,20,546 2,49,755 17,947 2,67,702
3 1,20,546 3,88,249 27,899 4,16,148
4 1,20,546 5,36,694 38,566 5,75,260
5 1,20,546 6,95,807 50,000 7,45,807 1,70,546
6 1,20,546 6,95,807 50,000 7,45,807 1,70,546
7 1,20,546 6,95,807 50,000 7,45,807 1,70,546

He can invest Rs 1,20,546 annually in a tax-saving fixed deposit at a 7% interest rate to receive a tax-free return. Upon maturity of the first FD at the end of the fifth year, he’ll get Rs 1,70,546, resulting in a return of Rs 49,999.85. Throughout the five years, his interest income from fixed deposits remains below Rs 50,000. The investor can claim a tax deduction of Rs 50,000 under Section 80TTB annually while filing the income tax return. Additionally, there will be no TDS deduction for the entire five years.
Starting from the fifth year, the maturity amount withdrawn will be higher at Rs 1.70 lakh, while the reinvestment amount will be lower at Rs 1.20 lakh.
Investing Rs 1,11,124 annually in an FD at a 7.5% interest rate for five years will guarantee a tax-free return.

Principal Amount Rs 1,11,124 Interest 7.50%
New Principal Investment (Rs) Balance at the Beginning of the Year (Rs) Interest Earned During the Year (Rs) Balance at the End of the Year (Rs) Maturity Amount Taken Out (Rs)
1 1,11,124 1,11,124 8,572 1,19,696
2 1,11,124 2,30,820 17,804 2,48,624
3 1,11,124 3,59,748 27,749 3,87,497
4 1,11,124 4,98,621 38,462 5,37,083
5 1,11,124 6,48,207 50,000 6,98,207 1,61,124
6 1,11,124 6,48,207 50,000 6,98,207 1,61,124
7 1,11,124 6,48,207 50,000 6,98,207 1,61,124

Key considerations for tax-free FD returns

It is important to note that Section 80TTB considers interest income from savings accounts, post office deposits, and cooperative banks. We’re assuming here that the senior citizen’s only interest income is from the fixed deposit. If the investor earns interest from any other deposit, such as a savings bank account, it needs to be factored into their calculations.
When investing in a tax-saving FD, it’s important to consider that fixed deposit interest rates may vary annually, requiring adjustments to FD amounts. We’ve used a consistent interest rate for explanation purposes. Additionally, FD deposits should align with the investor’s overall investment horizon. Therefore, consider your risk appetite carefully when booking an FD.



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