Start your tax saving investments in April for the new financial year 2021-22, so that you don’t have to run around searching for investment avenues later. The tax planning decisions should be taken wisely considering your financial goals.

With the second wave of COVID-19 pandemic and mini-lockdowns being announced in some states of India, the equity market is volatile. In this situation investments in equity linked savings scheme (ELSS) for tax-saving seems risky for risk-averse investors.  An investment in five-year tax-saving fixed deposits (FDs) offers relief to such investors in this scenario. Also, investors prefer FDs as returns are assured. Those in the lower tax brackets find bank FDs more attractive.

By investing in these FDs you can avail of the tax benefit available under section 80C of the Income Tax Act. Investments up to Rs 1.5 lakh can be done in a financial year. Tax-saving FDs have a lock-in period of five years and premature withdrawals are not allowed.

Even though bank FD rates have fallen to low levels, there are some banks that offer you attractive interest rates.

Higher interest rates are offered by smaller private banks

Smaller private banks offer interest rates of up to 6.75 per cent on tax-saving FDs, according to data compiled by BankBazaar. These interest rates on tax-saving FDs are higher compared to leading public sector banks.

DCB Bank and Yes Bank tops the chart with 6.75 per cent interest, followed by RBL Bank offering 6.6 per cent interest on five years tax-saving FDs.

Ujjivan Small Finance Bank and AU Small Finance Bank offer 6.75 per cent and 6.25 per cent interest respectively on tax-saving FDs. The interest rates offered by small finance banks are higher compared to leading private banks. The foreign banks such as DBS Bank and Deutsche Bank offer 5.50 per cent and 6.25 per cent interest respectively on tax-saving FDs.

Private Banks such as Axis Bank, ICICI Bank and HDFC Bank offer 5.75 per cent, 5.35 per cent and 5.30 per cent interest respectively on tax-saving FDs.

The highest rate offered by a public-sector bank on a 5-year tax-saving FD is Union Bank of India that offers 5.55 per cent interest, followed by Canara Bank and State Bank of India (SBI) offering 5.50 per cent and 5.40 per cent interest on tax savings FDs respectively. Bank of Baroda is offering 5.25 per cent interest on tax-saving FDs.

Also read: Union Bank, Central Bank of India offer the lowest interest rates on personal loans

A sum of Rs 1.5 lakh invested in DCB Bank and Union Bank of India tax-saving FDs grows to Rs 2.10 lakh and 1.98 lakh, respectively, after five years.

Smaller private banks that have a low customer base typically offer higher rates to attract customers and depositors. That’s why government-owned banks offer lower rates. Just because a bank is offering you a high rate, doesn’t mean you should necessarily invest in it. Go for higher rates, but also go for reasonably larger banks with a strong management and financials.

Also read: Punjab & Sind Bank and Bank of India offer the cheapest gold loans

A note about the table

Data compiled as on April 7 2021 from respective banks' website. BankBazaar has accounted for FDs belonging to only those foreign, private, small and public sector banks that are listed on the stock exchanges. Banks, for which data is not available on their respective websites, were dropped. These rates are only of tax-saving five-year FDs for non-senior citizens.