Tax Saving Fixed Deposit (FD)

A tax-saving FD lets you invest while claiming deductions under Section 80C. Learn about tax saving fixed deposit features, benefits & how it works.
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Tax Saving FD
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3 mins
20-May-2025

Tax Saving Fixed Deposit (FD) offer a smart way to grow your savings while enjoying tax benefits. If you're looking for a secure investment option that can help you reduce your tax burden, Tax Saving FDs are worth considering. These FD allow you to claim deductions under Section 80C of the Income Tax Act, 1961, effectively lowering your taxable income. In this article, we delve into the world of Tax Saving FDs, exploring their features, benefits, and how they can be a valuable addition to your financial portfolio.

What is tax saving fixed deposit?

A tax saving FD is a special type of fixed deposit that allows investors to claim tax exemption under Section 80C of the Income Tax Act, 1961. This means you can deduct the amount you invest in the FD from your total taxable income, up to a limit of Rs. 1.5 lakh per financial year.

How does a tax-saver fixed deposit work?

Following are the insights regarding how tax saving FD works:

1. Booking of FD

After selecting a financial institution, individuals decide how much they will deposit and proceed with the account opening process.

2. Selection of maturity period

The lock-in period of tax saving FD is 5 years. Individuals can choose a maturity period longer than that.

3. Claim for tax deduction

After booking the tax-saving FD, individuals become able to claim tax deductions under Section 80C of the Income Tax Act.

4. Maturity value after TDS

The fund deposited in the account grows at a fixed FD rate. The earning on this FD is taxable and financial institutions provide the maturity value after subtracting the tax deducted at source or TDS.

Fixed deposit variants

Highest Credit Ratings | Trusted with over 1.4 million Deposits | Assured Returns on FD
Recommended

FD - Special Tenure -18 Months

INTEREST RATES UP TO
7.95% p.a.
Invest Online

FD - Special Tenure - 22 Months

INTEREST RATES UP TO
7.85% p.a.
Invest Online

FD - Special Tenure - 33 Months

INTEREST RATES UP TO
7.75% p.a.
Open FD

FD - Age below 60

INTEREST RATES UP TO
7.40% p.a.
Open FD

FD - Senior Citizen

INTEREST RATES UP TO
7.95% p.a.
Open FD

FD – Minor

INTEREST RATES UP TO
7.40% p.a.
Open FD

Features of tax saving fixed deposit

Key features of a tax-saving fixed deposit (FD) are-

  • Tax Benefits: A Tax-Saving FD allows you to claim an income tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961.
  • Lock-in Period: The investment has a mandatory lock-in period of five years.
  • Tax on Interest: The interest earned on a Tax-Saving FD is taxable and subject to TDS (Tax Deducted at Source).
  • Limited Flexibility: Premature withdrawals, loans against deposits, or overdraft facilities are not available for Tax-Saving FDs.
  • No Auto-Renewal: There is no automatic renewal feature for Tax-Saving FDs.
  • Flexible Interest Payouts: You can choose to receive interest monthly, quarterly, or reinvest it in the principal amount.
  • Fixed Interest Rates: The interest rate remains fixed for the entire five-year tenure.
  • Varying Interest Rates: Interest rates can vary across banks and between individual and HUF accounts.
  • Account Ownership: Tax-Saving FDs can be held individually or jointly. However, only the first account holder can claim tax benefits.
  • Lump sum deposit: With a fixed deposit, individuals can invest an amount of up to Rs.Rs. 3 crore.  Nevertheless, if the objective is only to reduce tax obligations, individuals can book an FD of up to Rs.1.5 lakh since Section 80C does not offer a tax benefit of more than that amount.

Advantages of tax saving FD compared to other Section 80C investments

Section 80C of the Income Tax Act allows for deductions on various investments, with Equity Linked Savings Schemes (ELSS) and Public Provident Fund (PPF) being popular choices. While these offer tax benefits, Tax Saving FDs have certain advantages:

  • No market risk: Unlike ELSS, which is market-linked and carries investment risks, Tax Saving FDs offer guaranteed returns, making them a safer option for risk-averse investors.
  • Shorter lock-in period: While ELSS has a 3-year lock-in, Tax Saving FDs generally have shorter lock-in periods, providing greater liquidity.
  • Flexibility in investment amounts: While ELSS has a low minimum investment of ₹500, Tax Saving FDs might have higher minimums (e.g., Rs. 10,000). However, they often offer more flexibility in investment amounts compared to PPF, which has a minimum investment of ₹500 and a 15-year lock-in period.

How much should you invest under the Tax Saving Fixed Deposit (FD) scheme?

Determining the ideal investment amount for Tax Saver FDs and tax saving FD requires a personalized approach. Consider factors like your income, existing tax liabilities, financial goals, and risk tolerance.

Here's a simple guide:

  1. Utilize a tax saving FD calculator: These online tools can estimate your potential tax savings based on your income, investment amount, and applicable tax rates.   
  2. Factor in your income and tax bracket: Higher incomes generally translate to greater tax savings.
  3. Set realistic financial goals: Align your investment with specific goals like retirement planning or a down payment for a house.
  4. Consider your risk tolerance: While Tax Saver FDs offer lower risk compared to market-linked options, ensure the lock-in period aligns with your financial needs.

Who should invest in a tax saving fixed deposit (FD)?

Tax Saving FDs are ideal for individuals seeking a safe and reliable investment avenue coupled with tax benefits. Here are two main groups who could benefit:

Risk-averse investors

If you prioritize stability and guaranteed returns over high-risk investments like stocks, a Tax Saving FD offers a secure option. It ensures your principal amount remains safe while providing a fixed interest rate for the entire tenure.

Taxpayers seeking deductions

Individuals looking to reduce their taxable income can utilize Tax Saving FDs to claim deductions under Section 80C of the Income Tax Act. This is particularly beneficial for those in higher tax brackets, as it can significantly lower their tax liability.

Also read: Difference in Section 80C tax break on interest on NSC

Documents required for tax-saving FD

Individuals will have to submit the following documents while opening their tax-saving fixed deposit accounts:

  • Government-approved ID proof: Passport, ration card, driving licence, etc.
  • Proof of age: Aadhaar Card, voter ID card, etc.
  • Residential proof: Telephone bill, passport, bank statement, electricity bill, etc.
    Recently clicked passport-size photographs.

Tax-saving fixed deposit is best for individuals who want to enjoy the dual benefit of growing their funds at a stable interest rate and enjoying a tax deduction. Individuals willing to grow their money securely can now easily apply to open their fixed deposit accounts online. They can reduce their net taxable income by up to Rs.1.5 lakh, depending on how much they invest.

Also read: 7 Tax saving investments to save tax under Section 80c

Things to consider regarding tax-saving fixed deposits

Here are different aspects that individuals need to check while booking their fixed deposit:

1. Interest rate

While booking a fixed deposit, individuals need to check and compare the tax-saving FD rate across several financial institutions. With a higher rate of interest, they can increase their earning potential significantly.

2. Time horizon for investment

Individuals may have different financial goals or sets of plans for their investments. For example, they may want to save and grow the fund for their child's education, or the marriage ceremony of their sons and daughters. Since it has a definite lock-in period of 5 years, they need to ensure that the planned events do not fall within this time frame.

3. Security rating

Individuals also should ideally check the security ratings of the tax-saving fixed deposits. Different credit agencies like CIBIL and ICRA provide safety ratings to help customers know how risky the fixed deposit account for a certain financial institution can be.

Comparison with other tax-saving investments

Investment Type

Returns

Lock-in Period

Tax on Returns

Tax saving FD

3% to 8%

5 -10years

Yes

Public Provident Fund (PPF)

7.1% (Q3 of FY 2024-25)

15 years

No

National Savings Certificate (NSC)

7.7% (Q3 of FY 2024-25)

5 years

Yes

National Pension System (NPS)

9% to 12%

Till Retirement

Partially Taxable

 

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator

Sukanya Samriddhi Yojana Calculator

PPF Calculator

Gratuity Calculator

Recurring Deposit Calculator

Provident Fund Calculator

 

Frequently asked questions

Which FD is eligible for 80C?

To qualify for tax deductions under Section 80C, you must invest in 5-year tax-saving fixed deposits (FDs). These FDs have a mandatory lock-in period, meaning you cannot withdraw your funds before the 5-year term is complete.

Which FD is best for tax saving?

The best tax-saving FD depends on your goals. Consider interest rates, your tax bracket, and the bank's reputation. Compare offerings before choosing.

What is the difference between FD and tax saver FD?

Regular FDs offer flexibility – you can choose tenure and withdraw prematurely (with penalties). Tax-saving FDs are exclusively for Section 80C deductions, with a mandatory 5-year lock-in.

Is 5-year FD tax-free for 5 years?

Tax Saving Fixed Deposits have a 5-year lock-in period. The principal investment qualifies for a tax deduction under Section 80C, but the interest earned on the deposit is taxable according to your income tax bracket.

Can fixed deposit reduce tax?

Yes, investing in a tax-saving fixed deposit with a tenure of 5 years can reduce your taxable income. The principal amount invested in such an FD qualifies for a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.

Can I break a tax-saving FD?

No, tax-saving FDs come with a mandatory lock-in period of 5 years. You cannot break or withdraw from the FD before the completion of this period, making it a non-liquid investment option.

Does tax-saving FD come under Section 80C?

Yes, tax-saving fixed deposits qualify for a deduction under Section 80C of the Income Tax Act. The principal amount invested in these FDs is eligible for a deduction of up to Rs. 1.5 lakh, reducing your taxable income.

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Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.