BAJAJ BROKING
March 18, 2025
8 mins read
What is a Tax-Saving FD?
A tax-saving FD is a type of fixed deposit that offers tax benefits under Section 80C of the Income Tax Act. By investing in a tax-saving fixed deposit, individuals can claim a deduction of up to ₹ 1.5 Lakh on their taxable income. These deposits come with a mandatory lock-in period of five years. You cannot make any premature withdrawals during this period.
When you invest in a tax-saving FD, you deposit a fixed amount with a bank or financial institution for five years. During this period:
The principal amount is locked in, and you earn a fixed interest rate.
You cannot withdraw funds before maturity.
The interest earned is taxable, unlike some other tax-saving instruments.
You can invest a minimum of ₹ 1,000 and a maximum of ₹ 1.5 Lakh per financial year.
At maturity, the principal and interest are credited to your bank account after deducting applicable taxes.
Any individual or Hindu Undivided Family (HUF) can invest in a tax-saving FD. However, certain entities, such as corporations or partnership firms, are not eligible. Joint account holders can also invest, but only the primary account holder can claim the tax deduction.
A tax-saving fixed deposit comes with specific characteristics that differentiate it from regular fixed deposits. Below are the key features:
Tax Benefits: Investments in tax-saving FDs qualify for deductions under Section 80C of the Income Tax Act, allowing investors to claim up to ₹1.5 lakh in deductions per financial year.
Fixed Tenure: These FDs have a mandatory lock-in period of five years, meaning funds cannot be withdrawn prematurely.
Guaranteed Returns: Since tax-saving FDs are not market-related, they offer fixed interest rates, ensuring predictable earnings.
Interest Rate Variation: Banks and financial institutions offer different interest rates, with senior citizens generally receiving higher returns compared to regular investors.
Interest Payout Options: Investors can choose between cumulative (where interest is paid at maturity) and non-cumulative (where interest is paid at regular intervals) options.
Tax on Interest Earned: While the investment amount qualifies for tax deduction, the interest earned is taxable and subject to TDS (Tax Deducted at Source) if it exceeds the specified threshold.
No Loan or Overdraft Facility: Since tax-saving FDs are locked in for five years, they cannot be used as collateral for loans or overdrafts.
Safe and Secure: Being a bank deposit, a tax-saving FD is a secure investment backed by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to a specified limit.
Investing in a tax-saving FD offers multiple benefits, especially for salaried individuals and risk-averse investors. Some of the major tax advantages include:
Reduction in Taxable Income: The invested amount (up to ₹ 1.5 Lakh) is deducted from taxable income.
Fixed Returns Without Market Risks: Unlike ELSS or mutual funds, tax-saving FDs are not affected by market fluctuations.
Multiple Investment Modes: Available in cumulative and non-cumulative options based on payout preferences.
Flexibility: You can choose the amount you wish to invest and the mode of investment.
Reasonable Lock-in Period: Unlike NPS or PPF, tax-saving FDs have a moderate lock-in period of 5 years.
The amount an investor should allocate to a tax-saving fixed deposit depends on their financial goals, risk appetite, and tax-saving requirements. Since investments in a tax-saving FD qualify for deductions under Section 80C of the Income Tax Act, the maximum deductible amount is ₹ 1.5 Lakh per financial year.
However, deciding the ideal amount requires considering:
Tax Bracket: Investors in higher tax slabs benefit more from tax-saving FDs due to the significant tax deduction available.
Liquidity Needs: Since a tax-saving FD has a lock-in period of five years, it is important to ensure that the invested amount is not needed for immediate expenses.
Diversification Strategy: You should balance their portfolio by allocating funds across multiple tax-saving instruments such as PPF, ELSS, and NPS to optimise returns and risk exposure.
Interest Income Taxability: While the principal qualifies for tax deductions, the interest earned is fully taxable. You should calculate the post-tax returns before finalising the investment amount.
A well-planned investment strategy ensures that the amount parked in a tax-saving FD aligns with one’s financial plan while maximising tax benefits.
Investing in a tax-saving FD is straightforward. Follow these steps:
Choose a Bank or NBFC: Compare interest rates and features.
Select Investment Amount: Decide how much you want to invest (up to ₹ 1.5 Lakh per year).
Pick an Interest Payout Option: Choose between cumulative (compounded) or non-cumulative (regular payout) interest.
Submit KYC Documents: Provide PAN, Aadhaar, and address proof.
Fund the Deposit: Use internet banking, cheque, or cash to invest.
Get the Fixed Deposit Receipt: This serves as proof of investment for tax filing.
Who Should Invest in a Tax-Saving FD?
A tax-saving fixed deposit is a suitable investment option for individuals looking for a secure way to save taxes while earning fixed returns. It is particularly beneficial for those who fall under taxable income brackets and want to utilise the deductions available under Section 80C of the Income Tax Act. Here are some categories of investors who may find tax-saving FDs advantageous:
Salaried individuals: Those with a steady income who want to reduce their taxable income while ensuring capital protection.
Retirees and senior citizens: Investors looking for risk-free investment avenues with assured returns, especially with the added advantage of higher interest rates offered by banks to senior citizens.
Conservative investors: Individuals who prefer stability over high-risk investments like equity-linked savings schemes (ELSS) or market-linked instruments.
First-time investors: Those who are new to tax-saving investments and want a simple, hassle-free option to claim deductions.
Individuals nearing retirement: People who wish to park their funds in a safe instrument to meet short-term financial needs post-retirement.
To open a tax-saving fixed deposit, banks and financial institutions require investors to submit certain documents for verification. The required documents typically include:
Identity Proof (Any one of the following):
Aadhaar Card
PAN Card (mandatory)
Passport
Voter ID
Driving Licence
Address Proof (Any one of the following):
Aadhaar Card
Passport
Utility bills (electricity, water, or gas bill)
Bank statement with a cheque
PAN Card – It is mandatory to provide a valid PAN card while opening a tax-saving FD to comply with income tax regulations.
Passport-Sized Photographs – Most banks require two passport-sized photographs for documentation.
Bank Account Details – Investors need to provide their bank account number, IFSC code, and a cancelled cheque for linking the FD with their account. Or, you can use internet banking of your existing account to open an FD.
Ensuring all necessary documents are available speeds up the FD account opening process and avoids delays.
Investing in a tax-saving fixed deposit requires evaluating several critical factors to ensure it aligns with financial goals. Below are key aspects investors should consider:
1. Interest Rate
Different banks and NBFCs offer varying interest rates on tax-saving FDs, typically ranging between 5% to 7.5% per annum, depending on the financial institution and tenure.
Senior citizens usually get a higher interest rate (generally 0.25% to 0.50% more than regular investors).
Comparing interest rates across multiple banks can help investors maximise returns.
2. Investment Duration
A tax-saving FD comes with a mandatory lock-in period of five years, meaning premature withdrawals or loans against the FD are not permitted.
Investors should assess whether they can keep their funds locked for five years without requiring liquidity.
3. Security Rating
Choosing an FD with a high credit rating ensures investment safety. Ratings by agencies like CRISIL, ICRA, or CARE indicate the credibility and financial health of the institution offering the FD.
Banks generally have low risk, but for NBFCs or corporate FDs, checking ratings is essential.
4. Tax Implications
The principal amount qualifies for deduction under Section 80C, but the interest earned is taxable as per the investor’s income slab.
If interest income exceeds ₹ 40,000 (₹ 50,000 for senior citizens) in a financial year, TDS (Tax Deducted at Source) at 10% is applicable.
5. Auto-Renewal and Maturity Options
Some banks allow auto-renewal of tax-saving FDs, but investors should confirm whether the new deposit will also have a lock-in period.
Upon maturity, the FD amount, along with interest, is credited to the investor’s bank account.
6. Frequency of Interest Payouts
You can choose between monthly, quarterly, or annual interest payouts.
If not withdrawn periodically, interest is compounded, offering higher cumulative returns at maturity.
When considering tax-saving investments, it is essential to compare different options based on factors such as lock-in period, returns, liquidity, and tax benefits. Tax-saving fixed deposits are a popular choice due to their guaranteed returns and simple structure. However, other investment options like the Equity-Linked Savings Scheme (ELSS), National Pension System (NPS), Public Provident Fund (PPF), and National Savings Certificate (NSC) also offer tax benefits under Section 80C. Below is a comparison of tax-saving FDs with other common tax-saving instruments to help investors make an informed decision.
Feature | Tax-Saving FD | ELSS (Mutual Funds) | PPF | NPS | NSC |
Lock-in Period | 5 years | 3 years | 15 years | Till the age of 60 | 5 years |
Market Linked | No | Yes | No | Yes | No |
Risk Level | Low | High | Low | Medium | Low |
Applicable IT Act Section | Section 80C | Section 80C | Section 80C | Section 80CCD (1), Section 80CCD (2), and Section 80CCD (1B) | Section 80C |
Tax Deduction | Up to ₹ 1.5 Lakh | Up to ₹ 1.5 Lakh | Up to ₹ 1.5 Lakh | Up to ₹ 1.5 Lakh, plus an additional ₹ 50,000 under Section 80CCD (1B) | Up to ₹ 1.5 Lakh |
Tax on Interest | Taxable | Capital Gains tax on returns | Tax-free | 60% tax-free, 40% to be used to purchase annuity. | Tax-free |
Returns | Fixed | Market-linked | Fixed | Partially Market-linked | Fixed |
As you can see, each option has its own merits. ELSS has the shortest lock-in period, NPS gives you a monthly pension in your retirement, and tax-saving FDs offer fixed income with no market-related risks. You can choose the option that is best suited for your needs based on risk tolerance, investment horizon, and financial objectives.
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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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A 5-year tax-saving fixed deposit qualifies for tax benefits under Section 80C of the Income Tax Act. The investment amount, up to ₹ 1.5 Lakh per financial year, is eligible for deduction, but the interest earned is taxable.
Tax-saving FDs provide tax benefits under Section 80C, but returns vary by bank or financial institution. Comparing interest rates, payout options, and additional benefits, such as higher rates for senior citizens, can help choose the most suitable FD for tax savings and returns.
A regular FD allows flexible tenure and premature withdrawals, whereas a tax-saving FD has a mandatory 5-year lock-in period. Additionally, only tax-saving FDs qualify for deductions under Section 80C, reducing taxable income, though the interest earned remains taxable.
No, the interest earned on a tax-saving FD is taxable as per the investor’s income tax slab. It is added to the individual’s total income and taxed accordingly, even though the principal amount is eligible for deduction under Section 80C.
Yes, investing in a tax-saving FD allows individuals to claim a deduction of up to ₹ 1.5 Lakh under Section 80C. However, only the invested amount qualifies for deduction, while the interest earned is taxable as per the applicable income tax slab.
No, premature withdrawal is not allowed for tax-saving FDs. The mandatory lock-in period of five years means the funds cannot be accessed before maturity, unlike regular fixed deposits, which may offer early withdrawal with a penalty.
Tax-saving fixed deposits have a compulsory lock-in period of five years. No withdrawals or loans against these deposits are allowed during this period, making them a long-term tax-saving instrument under Section 80C.
Yes, senior citizens can invest in tax-saving FDs and enjoy tax benefits under Section 80C. Many banks and financial institutions offer higher interest rates for senior citizens, making tax-saving FDs an attractive investment option for retirees.
The maximum investment limit for a tax-saving FD is ₹ 1.5 Lakh per financial year. This amount is eligible for deduction under Section 80C, helping investors reduce taxable income while earning fixed returns over the mandatory five-year lock-in period.
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