A Tax Saving Fixed Deposit is great choice to if you're looking to save your taxes. You can reduce your taxable income up to ₹1.5 lakh under Section 80C of the Income Tax Act, although it comes with a mandatory lock-in period of 5 years. If prematurely withdrawn, the deduction would be considered as income in the year of you withdraw money from your FD. While the interest you earn on it is taxable, it remains a handy way to plan your taxes and preserve your wealth over the long term.
This article will cover how tax-saving FDs work, their features, eligibility, tax rules, and how they compare with other 80C investments, so that you can decide if it’s the right fit for your financial goals.
A tax-saving Fixed Deposit (FD) is a savings instrument that banks offer to individuals who earn interest while receiving tax benefits. It gives investors a safe way to grow their savings and reduce their taxable income while preserving their capital.
Under Section 80C of the Income Tax, an investor can claim a deduction of up to 1.5 lakhs per financial year if they invest in a tax-saving FD. They have a 5-year lock-in period, during which the principal amount cannot be withdrawn. The interest rates range from 5.5 - 7.75% p.a., and the interest is taxable as per the income tax slab.
While the principal invested in a tax-saving FD qualifies for deduction under Section 80C, the interest earned is taxable. Tax-saving FDs offer lower risk than other Section 80C options like PPF or ELSS, but come with limited liquidity due to the mandatory 5-year lock-in.
When you invest in a bank’s tax-saving FD, your money will be locked in for 5 years until maturity. You won’t be able to withdraw it or take a loan against it during this period. The bank will pay you a fixed interest rate for the entire tenure, usually from 5.5% to 7.75% per annum. The amount you invest qualifies for a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. However, the interest earned is taxable and added to your income. Your returns are guaranteed, and the overall risk involved is very low.
Indian residents, senior citizens, Hindu Undivided Families (HUFs), and NRIs can invest in Tax-Saving Fixed Deposits. These FDs are especially suitable for individuals who prefer a low-risk, secure investment, particularly those approaching retirement and seeking steady, guaranteed returns.
Investment Type | Returns (Approx.) | Lock-in Period | Tax on Returns | Risk Level |
Tax-Saving FD | 5.5% – 7.75% | 5 years | Taxable | Low |
Public Provident Fund (PPF) | 7.10% | 15 years | Tax-free (EEE status) | Very Low |
National Savings Certificate (NSC) | 7.70% | 5 years | Taxable | Low |
National Pension System (NPS) | 8% – 10% | Until Retirement | Partially Taxable | Moderate |
Equity Linked Savings Scheme (ELSS) | 12% – 15% | 3 years | Tax-free up to ₹1.5 lakh | High |