Fixed Deposit Beginner

Understanding the benefits of tax-saver fixed deposit

Understanding the benefits of tax saver fixed deposits

We have seen how FDs can help you grow wealth over time. However, a tax-saver fixed deposit is an investment where an individual can invest a certain amount of money for a specific period, usually five years. The tax benefit makes it an attractive investment option for individuals who want to save on taxes. Besides, tax-saver FDs are low-risk investments, providing guaranteed returns and ensuring the safety of the invested amount. Let’s understand the features of this investment vehicle popular with retail investors.

What is a tax-saving FD?

A tax-saver FD is a fixed deposit scheme that provides tax benefits to investors. These FDs come with a lock-in period of 5 years and offer a tax deduction of up to ₹1.5 lakhs under Section 80C of the Income Tax Act. The interest rate offered on these FDs is similar to regular fixed deposits but can vary depending on the financial institution. Investors can invest in tax-saving FDs offered by banks or post offices. It is a safe investment option for those looking to save on taxes while earning guaranteed returns.

Features of tax-saving FDs

Tax-saver FDs are a popular investment option that provides tax benefits to investors.

  • The main feature is the tax deduction benefit.
  • They have a lock-in of five years.
  • FDs provide an interest rate of 5.5% to 7.75% (as of March 2023).
  • Interest earned is taxable.
  • This type of FD allows only a one-time lump sum deposit.
  • FDs provide a higher interest rate compared to regular savings accounts.

Who is eligible to invest?

Individuals who have attained the age of 18 years and are citizens of India are eligible to invest in tax-saver FDs. Hindu Undivided Families (HUFs), charitable trusts, and private limited companies can also invest in these instruments. You can invest in them through various banks and financial institutions.

Points to remember before investing in tax-saving FD

Traditional FDs provide reasonably good interest rates on your investments. However, tax-saving FDs score because of the tax benefits one can avail of and the higher interest. But, as with any investment, it is better to read the fine print before you decide to invest. We discuss some of the salient features of tax-saving FDs.

Maximum limit on tax deduction

The tax deduction is an important aspect of financial planning. The Income Tax Act stipulates the maximum limit of tax deductions available for individuals. Section 80C of the Income Tax Act allows for deductions up to ₹1.5 lakhs per financial year. Understanding the maximum limit on tax deductions is important to maximize such investment options and optimize tax savings.

Interest is taxable

Interest earned on savings accounts, fixed deposits, and other financial instruments is subject to taxation in India. The interest income is considered a part of an individual’s total income and is taxed based on the applicable tax slab rate. It is important to note that the interest earned on a tax-saver fixed deposit is also taxable. However, it provides tax benefits under Section 80C of the Income Tax Act, as the investment made in these FDs can be claimed as a deduction up to a maximum of Rs. 1.5 lakh. Therefore, investing in tax-saver FD can help save taxes while earning interest.

The difference in the rate of interest

The interest rate on a tax-saver FD may differ depending on factors such as the amount deposited, the tenure, and the financial institution. Generally, longer terms and higher amounts yield higher interest rates. Additionally, some banks may offer promotional rates for new customers during specific periods. It is essential to compare the rates offered by different banks before investing.

The rate of interest can vary based on the type of investment. Various factors, including the current market conditions and the investment tenure, determine the interest rates on FDs. Additionally, banks may offer different interest rates for select customers based on their credit score and relationship with the bank.

Premature withdrawals

Premature withdrawals refer to the early closure of a fixed deposit account before its maturity date. Often, this results in a penalty fee and reduced interest rate for the account holder. It is advisable to avoid premature withdrawals as it defeats the purpose of investing in a fixed deposit. Most tax-saver FDs do not allow premature withdrawal. However, in emergencies, some banks allow early withdrawals with certain conditions. Most tax-saver FD schemes come with a lock-in period of 5 years and offer tax benefits under Section 80C of the Income Tax Act.

Nomination facility

A nomination facility is a service that banks and financial institutions provide to their account holders. It enables the account holder to nominate a person who would receive the proceeds or the amount in case of the account holder’s death. Individuals and organizations can avail of this facility, and it is advisable to nominate someone to avoid any legal issues in your absence. Like other instruments, you can have your nominee for tax-saver FDs also.

What are the documents required for tax-saving fixed deposits?

To open a tax-saver FD account, you must submit certain documents. A copy of your PAN card, proof of identity and address such as an Aadhaar card, passport, or voter ID card, and a recent passport-sized photograph would be required. Besides, you must fill out an account opening form and provide your signature. Keep all the documents handy to avoid delays in the account opening process.


In conclusion, tax-saver fixed deposits are a highly beneficial investment option for individuals looking to save on taxes while earning guaranteed returns. They offer a higher interest rate than regular fixed deposits and are locked in for five years, ensuring the investor stays invested longer.


How does tax saving fixed deposit work?

Tax-saving fixed deposits are a financial instrument allowing individuals to invest and claim tax deductions under Section 80C of the Indian Income Tax Act. They have a lock-in period of 5 years, and up to ₹1,50,000 per annum is tax-deductible on the principal amount. The interest earned is also subject to taxation. They offer a secure way to save on taxes while growing your savings.

Which FD is best for tax saving?

The best tax-saving Fixed Deposit (FD) can vary based on interest rates. As of now, DCB Bank offers one of the highest interest rates at 7.6%, making it a top choice for tax-saving FDs.

What is difference between tax saver FD and normal FD?

Tax-saver FDs offer tax benefits under Section 80C but have a lock-in period, while normal FDs lack tax benefits and provide liquidity without a lock-in period.

Is 5 year FD tax free for 5 years?

A 5-year Fixed Deposit (FD) is not entirely tax-free for 5 years. While the investment qualifies for tax benefits under Section 80C, the interest earned is taxable.

Disclaimer: Fixed deposit products are generally considered safe investments as they are not subject to market fluctuations. However, investors are advised to exercise caution while investing in FDs. Risks include the financial position and solvency of the issuing company/entity during the tenure of the deposit. The facts mentioned in this article are for informational purposes only and should not be considered investment/financial advice from CoinSwitch.

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