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Let's say that I open a new tax saving FD account with a bank with a deposit amount of Rs. 50,000. I understand that I can get a tax relief for the current financial year in which the FD account was opened. What I want to understand is what happens at the end of the financial year? I assume that the tax relief will only be applicable for one financial year. In-order to get a tax relief for the next financial year, do I have to open a new tax saving FD account every year? If I open a new account every year for 3 years, my investment will look something like this :

              Year1--Year2--Year3--Year4--Year5--Year6--Year7
Account 1     50K--------------------------end
Account 2     --------50K-------------------------end
Account 3     ----------------50K------------------------end

Alternately, I can invest another 50,000 in the same tax saving FD account every year for 3 years

              Year1--Year2--Year3--Year4--Year5--Year6--Year7
Account 1     50k-------------------------end
Account 1     --------50K-----------------end
Account 1     ---------------50K----------end

is my understanding of tax saving FD's correct? In either case, will I get the same tax relief every year? If yes, what are the pros and cons of each of the above strategies?

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The Tax saving FD's come with a lock-in period of 5 years. i.e. the tenor is fixed for 5 years and cannot be less.

I can invest another 50,000 in the same tax saving FD account every year for 3 years

Don't understand the question here. You cannot do something like this.

In-order to get a tax relief for the next financial year, do I have to open a new tax saving FD account every year?

Yes

Edit:
Fixed Deposits are for a fixed period and amount. One cannot keep adding into it. It is a new Fixed Deposit account every time you want to add something, even on same day.

Tax relief is only available for Fixed Deposits opened for a period of 5 years under the designated scheme. The rebate is valid only for that year. If you were to break the fixed deposit before 5 years, a tax of 30% [or as per you bracket] on the total amount would be deducted.

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  • So if I understand correctly, I can't deposit more money into a tax saving FD account once it has been opened and claim tax relief for it? The only option would be to open a new tax saving FD account? Also, can you address other assumptions and questions I have asked?
    – CKing
    Feb 15 '15 at 16:49

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