Tax-saving fixed deposits are among the most secure instruments through which you can save tax under section 80C of the Income Tax Act. These earn higher interest than savings accounts at no additional risk. Getting a tax-saving FD would take you as little as 20 minutes if you get it from the same bank where you have your savings account.

Tax-saving fixed deposit schemes:

  1. Have a lock-in period of five years
  2. Earn interest at the rate of 5.5% to 7.75% per annum at present
  3. The principal amount can be deducted from your income when calculating taxable income
  4. Earn an interest that is taxed according to the tax slab you fall under. So, if you are in the 30% tax bracket, you will have to pay the same tax rate on the interest income from fixed deposits as well.
  5. Allow for a large lump sum deposit at the start of the scheme
  6. TDS will be deducted on the interest earned if the total interest on your fixed deposits is higher than₹10,000 a year.

Investing in a tax-saving fixed deposit scheme has many benefits, including:

  1. Fixed deposits are a debt instrument and carry a much lower risk compared to equity-based instruments like an equity-linked saving scheme that you can use for tax-saving.
  2. Fixed deposits earn a higher interest rate than a savings account, at no additional risk.
  3. You can choose a tenure based on your requirements, as long as it is at least five years.
  4. After the five-year lock-in period, you can make a premature withdrawal in case of an emergency.
  5. After the five-year lock-in period, you can get a loan against the fixed deposit at reasonable interest rates.
  6. Fixed deposit rates for senior citizens is typically 25 basis points to 50 basis points higher compared to fixed deposit rates offered to other investors.
  7. You can claim a deduction of up to ₹1,50,000 under Section 80C towards the monies deposited in tax-saving fixed deposit schemes.

It is important to remember that no tax benefit is available on regular fixed deposits. Further, the interest income from tax-saving fixed deposit schemes is treated as a part of your taxable income and as such attracts the same tax rate as the rest of your income.

Tax-saving fixed deposits are ideal for any investor looking for low lock-in tax-saving investment that would earn a fixed, guaranteed return. As fixed deposits are considered risk free, you can also use them to balance your high-risk equity portfolio.

Different banks and NBFCs offer different interest rates on tax-saving FDs. Therefore, make sure that you compare the different offerings before making an investment. As the principal earns you a tax-benefit, the post-tax return on tax-saving fixed deposits can be higher than on regular fixed deposit even if the nominal interest rate is the same on both. The minimum investment allowed under this scheme is ₹100, and the maximum amount on which you can earn a tax benefit is ₹1,50,000.

If you still haven’t utilized the total amount available as a deduction under Section 80C of the Income Tax Act, then it is time for you to explore the tax-saving fixed deposit.


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