Fixed Deposits: Tax Saving FD for Sec 80C Deductions – Benefits & Interest Rates, Risks, Limits

Note: As per the updates of Budget 2021, Note: It has been proposed to exempt the senior citizens from filing income tax returns if pension income and interest income are their only annual income source. Section 194P has been newly inserted to enforce the banks to deduct tax on senior citizens more than 75 years of age who have a pension and interest income from the bank.

When it comes to savings, each individual has their own preferences. The savings instrument a person chooses may vary depending on the amount one can afford to save, the time horizon, the purpose of saving, and more. Fixed deposit (FD) accounts have been a popular choice for saving money since it is not dependent on market variations and has a constant interest rate guaranteed at the time of maturity.

1. What is a Fixed Deposit (FD) Account?

A Fixed Deposit (FD) is a financial investment instrument offered by banks and financial institutions where you deposit a lump sum of money for a fixed period at a predetermined interest rate. It is considered a low-risk, secure investment option that offers higher interest rates compared to regular savings accounts. The interest rate remains constant throughout the term, regardless of market changes. Premature withdrawals are allowed but may attract a penalty. FDs are ideal for conservative investors seeking stable returns.

2. Types of FDs Available

Fixed deposit accounts can be distinguished into several categories based on the benefits offered by the account, the account holder type, and the purpose for which the account is opened. Here, we have listed down some types of FD accounts:

1. Regular FD Account: The regular FD or Standard FD account is for individuals who are aged less than 60 years. The interest rates for such an FD account will be lesser than the one offered for senior citizens. Any Indian resident individual can open this account. Interest is paid at maturity or periodically.
2. FD Account for Senior CitizensThis account is dedicated to senior citizens, i.e. individuals aged above 60 years. Such account holders get a higher interest rate than usual and can access the monthly interest payout option, which can be thought of as a means for the monthly expenses for senior citizens.
3. Corporate FD AccountCorporate firms get a separate set of interest rates and deposit tenures with banks. Firms can deposit the excess funding or profits they have raised in such corporate FD accounts for the time being until they put the cash in use.
4. Tax-Saving FD AccountMany risk-averse individuals utilise the tax-saving FD accounts with a minimum lock-in period of five years to save income tax. Such deposits gain tax deduction up to Rs.1.5 lakhs under section 80C of the Income Tax Act, 1961.
5. NRO FD AccountNon-Resident Ordinary FD account can be opened by Overseas Citizen of India (OCI), Person of Indian Origin (PIO), and Non-Resident Indian (NRI). Any income earned in INR can be deposited only in NRO FD accounts. This account can be jointly held with an Indian resident as long as this person falls in one of the categories of relatives specified under Section 6 of the Companies Act, 1956.
6. NRE FD AccountA Non-Resident External (NRE) FD account can be opened by two or more NRIs. The account acts as the right way to convert the foreign currency earned outside India into Indian currency denominations. Both the principal and interest from this account are completely repatriable. The interest income from this account is exempted from tax under Section 10(4) of the Income Tax Act.
7. FCNR FD AccountForeign Currency Non-Repatriable FD account can be opened by NRIs and can deposit money earned overseas in India. The currencies generally accepted are US Dollars, Pounds Sterling, Euro, Japanese Yen, etc. The account allows you to retain your money in the same currency while earning good returns.
8. FD Account With Monthly PayoutThese FD accounts payout interest accumulated on a monthly basis. That is the interest accrued will not be added back to the principal, and the interest will not be compounded in this case. You can choose to get the interest component sent to your savings account on a monthly basis and utilise the sum for any expenses.
9. FD Account With Maturity PayoutIn this case, the interest gets accrued in the FD account over the deposit tenure, gets compounded, and you will receive the principal + interest components upon maturity of the FD account.
10. Post Office Fixed Deposit Account: Post Office Fixed Deposit (POFD) – Also Known as Post Office Time Deposit (POTD) is a savings scheme offered by India Post, backed by the Government of India. It is a safe, reliable, and low-risk investment option, especially popular among conservative investors and senior citizens.
11. Flexi Fixed Deposit: A Flexi Fixed Deposit—also known as a Sweep-In Fixed Deposit—is a special type of deposit that combines the features of a savings/current account and a fixed deposit. It offers the liquidity of a savings account and the higher returns of a fixed deposit.
12. Cumulative fixed deposit:  A cumulative fixed deposit (FD) is an investment option where interest earned is compounded annually and reinvested with the principal amount, resulting in higher returns at maturity. Unlike non-cumulative FDs, where interest is paid out periodically, cumulative FDs offer the benefit of earning interest on interest, leading to a lump sum payment of principal and accumulated interest at the end of the term.
13. Non-Cumulative fixed deposit: A non-cumulative fixed deposit (FD) is a type of investment where the interest earned is paid out regularly, such as monthly, quarterly, or annually, rather than being compounded and paid at maturity like a cumulative FD. This allows investors to receive a regular stream of income from their investment.

3. Top 20 Bank FD Interest Rates in India for 2025:

*FD interest rates are subject to change.

4. How to Open an FD Account?

Fixed deposit accounts can be opened either online or offline. Here is the general process to follow: Online:

1. Log in to the selected bank’s net banking account.
2. Search for ‘Open a Fixed Deposit Account’ option among the available features and click on the option.
3. Fill up the online application form with the relevant information.
4. Upload the soft copies of all the requested documents.
5. Mention a nominee for the maturity amount if applicable.
6. Transfer the amount you would like to invest and complete the application.
7. In some cases, you may need to complete KYC verification, which can be done through a video call or by submitting documents.

Offline:

1. Visit the nearest branch of the bank or financial institution.
2. Request for the FD application form and duly fill application form with relevant details.
3. Attach the requested documents, such as proof of identity and address, with the application form and submit them at the counter.
4. Provide a cheque/cash for the amount that you would like to invest.
5. Your application will be processed, and the account will be opened as per the timelines specified by the bank/financial institution.

5. What Does Lock-in Period Mean for FDs?

In the case of an FD account, the lock-in period is the same as the maturity period or deposit tenure. This simply means that you cannot withdraw the amount deposited within this duration. Even if you do, it comes with a penalty. When it comes to tax-saver FD schemes, you strictly cannot withdraw the funds within five years from the date of account opening. In the case of other FD schemes, premature withdrawal is still allowed with certain penalty terms defined at the time of opening the account. The terms may differ from bank to bank. It is advised that you oblige to the lock-in period and let the principal accrue interest without disturbing it to gain the maximum benefit.

6. What Does Loan Against FD Mean?

A "loan against fixed deposit" (LAFD) is a type of secured loan where you use your existing fixed deposit (FD) as collateral to borrow money, allowing you to access funds without prematurely breaking your FD and losing potential interest. 

Consider that you have deposited Rs.1 lakh in a fixed deposit account with Bank B for a tenure of 3 years. Since you have made the deposit for a long period, the bank agrees to offer 6% p.a. and you are happy about it. However, at the end of the first year, you have come across an emergency situation and need Rs.70,000. If you withdraw the deposit prematurely, you will be penalised and will not receive the expected returns. In this scenario, the bank will suggest you take a loan on the FD instead of closing the deposit account. That is you can take a loan on the FD amount, utilise the money for the emergency, and pay it back before the account maturity. This allows the FD account to accrue interest as usual and you receive money to address the emergency, both at the same time.

7. Features and Benefits of FD Accounts

• The investment tenure of FDs ranges from seven days up to ten years, and it varies across banks.
• The return on investment is compounded periodically; it may be monthly, quarterly, or annually.
• Senior citizens are provided with 0.5% higher returns as compared to regular customers.
• Partial and premature withdrawals may be permitted with penalties.
• Taxpayers can invest in tax-saver FD schemes to save taxes under Section 80C of the Income Tax Act, 1961.
• Upon maturity of the FD account, investors can reinvest the sum for another term.
• Loan against FDs are available which offer liquidity during emergencies.
• Investors will accumulate higher returns if they invest for an extended period.
• Returns are assured as they are not tied with the market highs and lows as in the case of mutual funds.
• The investment is safe as banks and other financial institutions are always under the purview of the Reserve Bank of India (RBI).
• Compounded interest makes your investment grow at a much faster rate.
• Premature withdrawals are allowed, so you will always have a corpus to fall back on at times of crisis.
• FD Interest rates are generally higher than regular savings accounts, allowing for better returns on your savings.
• Some FDs offer features like auto renewal, nomination facility and higher interest rates for senior citizens.

8. Eligibility Criteria for fixed Deposit Investment

The following eligibility criteria are applicable to open an FD account in India. There may be additional criteria that are bank-specific.

• Individuals who are resident Indians
• Joint account by two or more Individuals
• Senior citizens
• Minors
• Blind people
• Illiterate people
• Non-Resident Indians (NRIs)
• Sole proprietorship companies
• Societies, trusts, clubs, associations, etc
• Religious and educational institutions
• Companies
• Partnership firms

Documents Required:

• Proof of Identity
  • Passport
  • PAN card
  • Voter ID
  • Driver’s license
  • Aadhaar card
• Proof of Address
  • Passport
  • Aadhaar card
  • Bank statement with a cheque
• Proof of Date of Birth
  • Service discharge certificate
  • PAN card
  • Aadhaar card
  • Voter ID

9. Advantages of FD

• Saving Habit: Opening an FD account teaches you an important financial lesson—saving. Once you get the taste of saving and appreciate the magic of interest in addition to your savings, you will learn to save more and more going forward. This will help reduce the habit of spending on unnecessary things.
• Guaranteed Returns: Many investment instruments give out varied returns based on the market fluctuations; even the payout of capital investment may not be guaranteed. In contrast, the FD account assures to return both principal amount and an interest component at the end of the deposit tenure as promised.
• Flexibility: You can choose a deposit tenure based on your requirement and convenience. You can deposit the money for a duration as short as 7 days or as long as 10 years and let the money acquire some attractive interest on its own.
• No Maintenance: Unlike the case of stocks and mutual funds, you can deposit the money and relax. Active management is not necessary when it comes to an FD account.
• Easy Liquidity: Though there is a lock-in period for the account, you can liquidate the investment whenever you want. The lock-in conditions are not as stringent as any other investment instrument.
• Safety: Consider that the bank with which you have deposited money defaults. Don’t worry! You will be eligible for a maximum compensation of Rs 5 lakh from Deposit Insurance and Credit Guarantee Corporation (DICGC) with effect from 4 February 2020. This arrangement makes FDs a safe investment option.
• Tax Benefit: You can get a tax deduction under Section 80C of up to Rs.1.5 lakh when you make an investment on a tax-saver FD scheme with a minimum lock-in period of five years.
• Capital Preservation: Your initial investment is protected, ensuring you receive both the original amount and the earned interest when the investment matures.
• Steady Income Stream: Fixed deposits offer a reliable source of income, particularly beneficial for retirees, with interest payouts available on a monthly, quarterly, or annual basis.
• Loan Facility: Fixed deposits can be used as collateral to obtain loans, allowing access to funds without having to break the deposit.

10. Limitations of FD

• Fixed Returns: Though the returns will not go south and a particular return percentage is guaranteed, the concept hinders the possibility of earning higher returns.
• Lock-in Period: FD accounts come with a specific lock-in period that is chosen by the customers themselves. The investment can be liquidated before maturity only at the cost of a penalty on the interest rate promised, which is nothing but a loss.
• Limited tax benefits: Though a 5-year tax-saver FD account is chosen by individuals to save tax in a safer way, the returns from the account are taxable under the Income Tax Act.
• Inflation Risk: When inflation outpaces the interest earned on your fixed deposit, the actual purchasing power of your investment may decline over time.
• Premature Withdrawal Penalties: Withdrawing your funds before the maturity date may result in a penalty and a reduced interest rate for the period the deposit was held.
• Tax Implications: Although fixed deposits offer certain tax benefits, the interest earned is taxable, which can reduce your overall returns.

11. FD Calculator

Utilise our easy-to-use FD calculator to check the returns you may receive when you invest a certain amount over a deposit tenure.

12. FD or ELSS – Which is the Best?

Take a look at the table to understand the difference between FD and Equity-Linked Savings Scheme (ELSS):

13. Who Should Invest in Fixed Deposit?

Fixed deposit accounts are an excellent investment vehicle for those investors who don’t want to bear any risk. If you wish to sustain the money over the years and are not looking for growing wealth or if you are looking for steady returns, you can go for FD accounts. Many pensioners, who have a lump sum resulting from retirement, invest the money in FD accounts such that the monthly interest payout from the account can be used as spending cash. You can also set aside a lump sum for the sake of your children or minors so they can utilise the sum at a later date for higher education. You can also use FD accounts if you are planning to build emergency funds.

14. Taxation on FD Earnings

You can take advantage of the income tax deduction provision under Section 80C of the Income Tax Act by investing up to Rs.1.5 lakh in a tax-saver fixed deposit account. The scheme ensures returns along with capital protection. However, you must note that the interest income from the account is fully taxable. The tax liability is totally dependent on your total income for the financial year and the tax slab you fall into. The interest income falls under the head ‘Income from Other Sources’. In addition, banks deduct tax at source if the interest earned exceeds Rs.40,000 in a financial year across all the accounts held with the bank. A TDS certificate will be issued to confirm the details of the deduction. Read here to know more about the taxation on FD returns.