Everything You Need to Know About Tax Saving Fixed Deposit

Various types of fixed deposit accounts cater to the needs of individuals and entities seeking to save funds for the future. While conventional FD accounts offer flexibility in choosing the account tenure, certain banks provide a specialised five-year FD scheme tailored for tax savings.

Investing in a five-year FD scheme under Section 80C of the Income Tax Act, 1961 enables individuals to claim income tax deductions. However, it’s crucial to note that the features, benefits, and terms of this scheme may differ from those of standard FD accounts. Familiarising yourself with the specifics of such FD accounts is essential to leverage their benefits effectively.

What is a Tax Saving FD?

A tax-saving fixed deposit account is best suited for saving taxes on your FD account while earning interest.

Under Section 80C of the Income Tax Act, 1961, individuals are eligible for a tax deduction of up to ₹1.5 lakh annually through this FD account. The account mandates a lock-in period of 5 years, during which the invested sum remains inaccessible. Taxation is applicable on the interest accrued, and the interest rate is subject to variation depending on the bank. Consequently, it presents itself as a feasible choice for those seeking to both save on taxes and secure a fixed return on their investment.

How Does Tax Saving FD Work?

A tax-saving fixed deposit is a financial product provided by banks and NBFCs, where a specified amount of money is deposited for a predetermined period. Typically, this tenure spans five years and allows for a deduction on taxes as per Section 80C of the Income Tax Act 1961. These deposits come with a lock-in period, prohibiting premature withdrawals. While the interest accrued is subject to taxation, upon maturity, the total amount, inclusive of interest, is transferred to the linked savings account.

Tax Saving Fixed Deposit Benefits

Fixed deposit accounts have been a trustworthy option for saving for years. Being a bank-affiliated investment vehicle closely overseen by the RBI, it provides investors with a guarantee of safety and minimal risk. Additionally, you can withdraw the deposited funds with accrued interest upon maturity. There are several advantages of using a tax-saving fixed deposit account:

  • Compared to your regular savings account, a tax saving FD has the potential of giving you higher interest rates.
  • The interest you earn on your fixed deposit account is subject to TDS.
  • These accounts enable investors to make a single lump sum deposit.
  • The minimum tenure is five years, although it can be prolonged further to qualify for tax benefits.
  • FDs provide flexibility regarding the deposit amount, catering to the preferences of the investor.
  • Under Section 80C of the Income Tax Act, 1961, investors can avail themselves of income tax deductions of up to Rs.1,50,000 annually.
  • Premature withdrawal options may be limited, giving you more ground for saving.

Who Can Invest in Tax-Free Fixed Deposit?

Since FDs have been the means of safe and trustworthy options for saving, investing in a tax-saving fixed deposit account seems an enticing option for everyone who wants good returns on their savings. Here is the list of individuals who can invest in tax-saving fixed deposit accounts:

  • Tax-saving fixed deposits are open for investment by both individuals and Hindu Undivided Families (HUFs).
  • They can be acquired from any public or private bank, with the exception of cooperative and rural banks.
  • It can be held either individually or jointly. However, in the case of a joint holding, only the primary account holder is eligible for tax benefits.
  • If you have a time deposit maintained at a post office for five years, you are eligible for being considered a tax-saving fixed deposit.

Things to Consider When Investing in a Tax-Saving Fixed Deposit

Having a fixed deposit account comes with many advantages and is the preferred method of saving for several individuals. But there are a few things to consider before investing in a tax-saving fixed deposit account, including the following:

  • Eligibility Criteria: Tax saver FD schemes are open for investment only to individuals and HUFs. Additionally, minors have the option to invest jointly with an adult.
  • Deposit Limit: The minimum investment required for a tax-saving fixed deposit differs across banks, with no specified upper limit. Nonetheless, the deductible amount under Section 80C is capped at ₹1.5 lakh.
  • Lock-in Period: The minimum lock-in period for tax-saving FDs is five years.
  • Withdrawal and Loan: Borrowing a loan against your FD savings or prematurely withdrawing your money before your FD term ends is not allowed in a fixed deposit account. So, this might not be ideal if you are looking for a flexible savings method.
  • Post Office Time Deposit: Post office time deposits allow for either an individual or joint ownership arrangement. In the case of joint ownership, the tax benefits are allocated solely to the primary account holder. They can be transferred between different post offices. Investing in these FDs for a period of five years makes you eligible for a deduction under Section 80C of the Income Tax Act.
  • TDS (Tax Deducted at Source): Interest on tax-saving fixed deposits is disbursed either monthly or quarterly and can be reinvested if desired. This earned interest is subject to taxation based on the applicable income tax bracket. To prevent TDS deduction, individuals can submit Form 15G to the bank, while senior citizens can submit Form 15H.


  1. What minimum amount is required to open a Tax Saver FD account?

    Typically, most banks stipulate a minimum deposit of ₹100 to open a tax-saving fixed deposit account.

  2. What is the range of maturity for tax saving FD?

    You can open an FD with a tenure for maturity between five to ten years.

  3. Are early withdrawals permitted in tax-saving fixed deposits?

    No, you cannot draw early withdrawals in tax-saving fixed deposits.

  4. What is the maximum tax deduction allowable through tax-saving FDs?

    Investors are eligible to claim up to Rs. 1.5 lakh annually through tax-saving FDs.

  5. Who should consider investing in a tax-saving Fixed Deposit?

    Individuals seeking to reduce their tax burden can opt for a tax-saving FD.

  6. Are there any inherent risks associated with tax-saving FDs?

    Typically, tax-saving FDs carry minimal risks.

  7. What occurs upon maturity of a tax-saving FD?

    Upon maturity, the sum accrued will be transferred to the savings bank account linked to the FD.

  8. Is the interest earned exempt from taxation?

    No, the interest earned is subject to taxation through TDS deductions.

  9. Do senior citizens receive preferential FD rates within this scheme?

    Indeed, many banks provide senior citizens with an additional interest rate incentive for this scheme.