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Tax Saving Fixed Deposit

Tax-saving fixed deposits or FDs are one of the popular FD types. One of the key benefits of this fixed deposit category is that it gives tax benefits besides stable returns.

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What is a Tax-saving FD?

A tax-saving FD lies under the category of fixed deposits. This FD type allows tax deductions under Section 80C of the Income Tax Act, 1961. In simple words, investors can claim a tax deduction of up to Rs. 1.5 Lakh per annum through tax-saving FDs. Tax-saving fixed deposits may offer tax benefits alongside stable returns irrespective of market fluctuations, however, it is extremely important to note that this fixed deposit type is the same as any other bank FD. Nonetheless, apart from general fixed deposit accounts, banks also offer a 5-year FD scheme particularly for tax-saving purposes.

Features of Tax-saving FDs

It is highly advised to investors to have a thorough look at the prime features of tax-saving FDs before making a final decision. Some of the key features of tax-saving fixed deposit schemes are as follows:

  • Interest rate is higher as compared to that of a savings account.
  • Interest earned on tax-saving fixed deposits is taxable.
  • A minimum lock-in period of five years, extendable for a longer period of time.
  • Minimum deposit amount is Rs. 1,000.
  • Maximum deposit amount is Rs 1.5 Lakh in a financial year.
  • Payout options include quarterly, maturity, half-yearly or monthly.

Eligibility for Tax-saving FDs

Individuals eligible for buying tax-saving FDs include:

  • Resident individuals of the country
  • Hindu Undivided Families

The eligible individuals can open a tax-saving fixed deposit account with a bank or post office. Opening a tax-saving FD with a non-banking financial company is also permitted.

Things to Remember Before Investing in Tax-saving FD

Here are some of the key aspects that one must keep in mind before investing in tax-saving fixed deposits:

  • Maximum Limit on Tax Deduction

Investors can claim an income tax deduction of up to Rs. 1.5 Lakh in a financial year against the tax-saving fixed deposits. Talking about senior citizens, the elderly can avail of a tax deduction to a maximum of Rs. 50,000 on the interest earned from tax-saving fixed deposits as per the Section 80 TTB.

  • Taxable Interest

The amount of interest on tax-saving fixed deposits is subject to taxation as per the tax bracket of the investor. TDS is deducted when interest is payable or reinvested on RD and FD exceeding the amount of Rs. 40,000 (for senior citizens, the amount is Rs. 50,000) in a financial year.

An investor can submit the Form 15 G/H for their FD with the bank so as to get exempted from tax. It must be noted that the maximum interest not charged to tax during the financial year (on submission of form 15 G/H) for Indian residents less than 60 years of age is Up to Rs. 2.5 Lakh, for senior citizens (Indian residents) between 60 and 79 years of age is up to Rs. 5 Lakh and for senior citizens above 80 years is up to Rs. 5 Lakh

  • Rate of Interest May Be Different

Multiple banks provide a bit higher interest rates to the elderly on tax-saving fixed deposits. The rates are more as compared to the rates offered to citizens who do not come under the senior citizen category. As a matter of fact, most of the banks offer senior citizens with FDs up to a 0.50% hike in the interest rates. In other words, there is no such differential interest rate on 5-year post office time deposits to senior citizens or general citizens.

  • Premature Withdrawals

Tax-saving fixed deposits do not come with the facility of premature withdrawals. Similarly, individuals cannot opt for a loan against this fixed deposit type.

  • Nomination Facility

Tax-saving fixed deposits come with a nomination facility. However, this facility cannot be exercised if the fixed deposit account is applied for a minor or held on behalf of a minor.

Documents Required for Tax-saving Fixed Deposits

If you are planning to open a tax-saving fixed deposit account, as an applicant, you will be required to submit a series of documents. The list includes:

  • Proof of identity (Passport, PAN card, Senior citizen ID card, Voter ID card, Driving license, Aadhaar Card)
  • Proof of residence (Passport, Telephone bill, Electricity bill, Bank Statement with Cheque, Certificate or ID card issued by Post office)

Here are a few things that tax-saving fixed deposit applicants must keep in mind while submitting the desired documents:

  • To provide original documents for verification purposes.
  • To provide photocopies of each document as well.
  • To provide a permanent address.
  • To provide a permanent telephone number.
  • To avoid overwriting. In case of any overwriting, one must countersign.

Things to Remember About Tax-saving FDs

The list includes:

  • You can easily book a tax-saving fixed deposit through your net banking or mobile application or your bank as in today’s time most banks feature a good digital base.
  • Door-to-door services for tax-saving fixed deposit accounts for senior citizens are offered by a few banks.
  • Opening an FD account is easy for a bank customer. However, people who have a bank account at a specific bank and want to opt for a fixed deposit at another bank must be prepared to follow the predefined procedure as per the bank as the process could vary. They may even have to pay a visit to the bank’s branch with the required documents.

Why Should You Choose Life Insurance Over Tax-saving Fixed Deposit?

Tax-saving fixed deposit is one of the popular fixed deposit types that lets you avail the benefits of tax deductions under Section 80C of the Income Tax Act, 1961. However, life insurance is still one of the widely sought after solutions that people rely on.

Life insurance is a contract between an individual and an insurance company under which the insurer promises to pay a particular sum in the event of the death of the life assured or on plan maturity. The life cover comes in exchange for a premium.

Here are some of the prime reasons you should consider choosing life insurance over tax-saving fixed deposits:

  • Life insurance gives you the option to insure and invest at the same time.
  • Life insurance lets you cover yourself for your whole life and not just a few years.
  • Life insurance protects you against various risks and grants your family members or dependents with financial protection in case of your unfortunate death.
  • Life insurance covers you for a longer period of time than you pay the premium for.
  • Under life insurance, you get various options like pension plan, saving plan, term plan and more to make a choice specific to your needs.
  • Life insurance gives you tax benefits not only under Section 80C, but also Section 80D of the Income Tax Act, 1961.

Disclaimer: The above information in relation to Fixed Deposits is for education purpose only and not to be construed as investment advice. Consultation with an investment advisor prior to any investment decision is highly recommended.

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FAQ About Tax Saving Fixed Deposit

  • Who should invest in tax-saving FD?

    People who are risk-averse, wish to gain guaranteed returns on a tax-saving option along with a short lock-in period should invest in tax-saving FDs. 

  • How much tax deduction can I claim with tax-saving FDs?

    If you are a salaried employee, you can easily claim a deduction of up to Rs 1.5 Lakh under Section 80CCD(1) for contributions made towards the NPS account.

  • Is my FD amount safe if I choose the tax-saving FD option?

    Since tax-saving fixed deposits are completely risk-free, the amount you invest will be completely protected. You will also get guaranteed returns. 

  • Can I make premature withdrawal under my tax-saving FD option?

    No! Unfortunately, you cannot prematurely withdraw your tax-saving FD before maturity. 

  • What will happen if my tax-saving FD matures?

    When your tax-saving FD will mature, the money will be credited to your source account after the end of the fixed deposit term.

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