Your Questions Answered: What is the difference between tax saver fixed deposit and sweep in fixed deposit facility?

The two commonly considered options for saving money and earning interest are tax saving fixed deposits and savings accounts with a sweep-in fixed deposit features. However, each has its distinctive pros and cons depending on individual financial goals.

Kuvera, MintGenie Team
First Published4 Aug 2023, 02:58 PM IST
Pros and cons of tax saving fixed deposits and sweep-in fixed deposits.
Pros and cons of tax saving fixed deposits and sweep-in fixed deposits.

Q. I am a 26-year-old doctor working at one of the leading hospital chains in Ghaziabad as a general practitioner. I have been investing around 40% of my income in a savings account with a sweep in fixed deposit. Some of my acquaintances have recently advised me to keep my money in a tax-saver fixed deposit. However, I am not clear about the difference between the two products. Can you please elaborate on the core features of both the products and their key differences?

Hemang Chaturvedi, Ghaziabad

If you are looking for a safe and reliable way to save money and earn interest, you may have come across two popular options: tax saver fixed deposit and savings account with sweep in fixed deposit facility. Both of these products offer some advantages and disadvantages, depending on your financial goals and needs. In this blog post, we will compare and contrast these two products and help you decide which one is more suitable for you.

Tax saver fixed deposit

A tax saver fixed deposit (FD) is a type of fixed deposit account that offers a tax deduction under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to Rs. 1.5 lakh per annum by investing in a tax saver FD for a minimum tenure of five years. The interest rate on tax saver FDs ranges from 5.5% to 7.75%, depending on the bank and the tenure.

Some of the key features of tax saver FDs are:

  • They have a lock-in period of five years, which means you cannot withdraw or break the FD before maturity.
  • The interest earned on tax saver FDs is taxable as per your income tax slab rate. The bank will deduct TDS (tax deducted at source) at 10% if your interest income exceeds Rs. 40,000 in a financial year (Rs. 50,000 for senior citizens).
  • You can invest in tax saver FDs either in single or joint names. However, the tax benefit will be available only to the first holder of the FD.
  • You can choose to receive the interest either monthly, quarterly, half-yearly, yearly or at maturity.
  • You cannot take a loan against your tax saver FD.

Some of the pros of tax saver FDs are:

  • They help you save tax up to Rs. 1.5 lakh under Section 80C.
  • They offer guaranteed returns at a fixed rate of interest.
  • They are low-risk and easy to open and operate.

Some of the cons of tax saver FDs are:

  • They have a long lock-in period of five years, which reduces your liquidity and flexibility.
  • The interest earned on them is taxable, which lowers your effective returns.
  • They offer lower returns than other tax-saving instruments like ELSS (equity-linked savings scheme) mutual funds, PPF (public provident fund) and NSC (national savings certificate).

Savings account with sweep in fixed deposit facility

A savings account with sweep in fixed deposit facility is a type of savings account that allows you to transfer the excess balance above a certain threshold to a linked fixed deposit account automatically. This way, you can earn higher interest on your surplus funds without compromising on the liquidity of your savings account.

Some of the key features of savings account with sweep in fixed deposit facility are:

  • You can set the threshold limit for your savings account as per your preference. Any amount above this limit will be swept into the linked FD account.
  • The amount getting transferred to the linked FD account will earn higher interest as the FD interest rates are higher than savings account interest rates.
  • You can access your funds anytime from your savings account. If your balance falls below the threshold limit, the required amount will be swept back from the linked FD account to your savings account.
  • The sweep in and sweep out transactions are free of charge and do not affect your FD tenure or interest rate.
  • The interest earned on the sweep in FD is taxable as per your income tax slab rate. The bank will deduct TDS at 10% if your interest income exceeds Rs. 40,000 in a financial year (Rs. 50,000 for senior citizens).

Some of the pros of savings account with sweep in fixed deposit facility are:

  • They help you earn higher returns on your idle funds without losing liquidity.
  • They offer flexibility and convenience as you can set your own threshold limit and access your funds anytime.
  • They do not have any lock-in period or penalty for premature withdrawal.

Some of the cons of savings account with sweep in fixed deposit facility are:

  • They do not offer any tax benefit under Section 80C or any other section.
  • The interest earned on them is taxable, which lowers your effective returns.
  • They may have a minimum balance requirement or charge for maintaining the savings account.

Comparison between tax saver FD and savings account with sweep in FD facility

 

Tax benefit: Tax saver fixed deposit offers tax benefit under Section 80C, while savings account with sweep in fixed deposit facility does not.

Interest rate: Tax saver fixed deposit has a higher interest rate than savings account with sweep in fixed deposit facility, but lower than regular fixed deposits.

Liquidity: Savings account with sweep in fixed deposit facility has higher liquidity than tax saver fixed deposit, as you can withdraw or break the sweep in fixed deposit at any time without any penalty.

Tenure: Tax saver fixed deposit has a fixed tenure of 5 years, while savings account with sweep in fixed deposit facility has a flexible tenure as per your choice.

What kind of investors should invest in such products?

Tax saver FDs are suitable for investors who want to save tax under Section 80C and are looking for a safe and fixed return on their investment. They are also ideal for investors who have a long-term horizon and do not need liquidity for at least five years.

Savings accounts with sweep in FD facilities are suitable for investors who want to earn higher returns on their surplus funds without compromising on liquidity. They are also ideal for investors who want flexibility and convenience in managing their funds and do not need any tax benefit.

Conclusion

Tax saver FD and savings account with sweep in FD facility are both useful products that can help you save money and earn interest. However, they have different features, benefits and drawbacks that you should consider before investing in them. You should choose the product that matches your financial goals, risk appetite and liquidity needs.

Kuvera is a free direct mutual fund investing platform.

Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

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First Published:4 Aug 2023, 02:58 PM IST
HomeMoneyPersonal FinanceYour Questions Answered: What is the difference between tax saver fixed deposit and sweep in fixed deposit facility?

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