Though you can open a fixed deposit (FD) account for a tenure ranging from 1 year to 10 years, the 5-year deposit is a special one owing to its tax-saving feature. Yes, your money gets locked in till the time of maturity, but the many benefits of this FD scheme make it a profitable investment option. 

So, if you’re planning to invest in a fixed deposit, make sure you stay invested for five years, at the least. This guide will help you plan your five-year FD.

How Does a 5-Year Fixed Deposit Work?

A tax-saving 5-years fixed deposit will function like any other FD account where you invest a lump sum for a fixed tenure (in this case, five years). Throughout the tenure, your money remains safe, earning interest at a pre-specified rate. Even if market conditions deteriorate, your investment doesn’t suffer and continues earning a steady rate of interest. However, you will not be able to withdraw your money before the time of maturity without attracting a penalty.

Important Things to Know about a 5-Year FD

These schemes offer you tax savings. Section 80 C of the Income Tax Act declares that tax exemptions can be claimed for an investment up to Rs. 1.5 lakhs.

The interest earned on the FD will be taxable and is deducted at source.

Facilities such as loans, overdrafts, or premature withdrawals are unavailable on a tax-saving FD.

The rate of interest remains unchanged throughout the five-year period.

The interest rate will vary across banks. Also, the interest rate for Indian citizens of Hindu Undivided Family (HUF) will be different.

The interest pay-out is flexible. You can choose to reinvest in the principal or opt for quarterly or monthly pay-outs.

You can hold a tax-saving five-year fixed deposit by yourself or as a joint account. In the case of the latter, the tax benefits will only be available to the first account holder.

Should You Invest in a Tax-Saving Five-Year Fixed Deposit?

Before you choose any investment option, the three important factors to consider are your age, investment horizon, and the level of risk involved. Considering these three factors, a tax-saving FD is suitable for you if –

You have a low-to-moderate risk appetite – Since a tax-saving FD offers the dual benefit of low risk and guaranteed returns, you should opt for it if you want to stay away from market fluctuations and have a low tolerance for risk.

You want to save on taxes – If you want your money to stay safe, deliver assured returns, and further offer you tax benefits, a five-year FD is the way to go.

How to Open a Tax-Saving Five-Years Fixed Deposit

Opening a five-year fixed deposit is risk-free and easy. You can easily open one online. Scour through different banks’ offerings to compare interest rates and other FD features.

Do remember to use an online FD calculator to see how much your invested amount will grow to. A five-year FD is the path of disciplined investing that eventually leads to assured returns and tax savings. So, why would you wait? Start growing your money today!