How an Offset Account Works
An offset account is a savings or current account linked directly to your home loan. Instead of earning interest on your savings (which is taxable), the balance in your offset account is subtracted from your home loan balance before the bank calculates your daily interest.
Example: If you have a ₹50L loan and ₹5L in your offset account, the bank only charges you interest on ₹45L. Because your monthly EMI remains the same, that saved interest goes entirely towards paying off your principal, destroying the loan years faster.
Tax Benefits
If you put money in a Fixed Deposit, you are taxed on the interest earned according to your income slab. By putting that money in an offset account instead, you "earn" your mortgage rate tax-free. Since home loan rates are usually higher than FD rates, and the savings are tax-free, an offset account is mathematically superior to keeping cash in an FD.