Tax-Saving Fixed Deposit: How it Works?

6 mins read
by Angel One
A tax-saving fixed deposit is like a regular FD that also offers tax benefits. The amount invested in tax-saving FDs is deductible u/s 80C of the Income Tax Act.

If you are looking for investment avenues that can help reduce your tax burden this year, there are various options available in India. Some, like the Public Provident Fund (PPF) and the National Pension Scheme (NPS), require annual deposits over the long term, up to 15 years or more. Others, like Equity Linked Savings Schemes (ELSS), come with market-linked risks. 

However, if you are a conservative investor with a medium-term investment horizon, a tax-saving FD may be a suitable option to consider. In this article, we’ll examine what a tax-saving FD is, discuss how it works and how to save tax on FD interest.

What is a Tax-Saving FD?

A tax-saving fixed deposit (FD) is a term deposit scheme that offers the benefit of income tax deductions under section 80C of the Income Tax Act. You can open a tax-saving FD, also known as a tax-saver FD, with most leading banks and non-banking financial companies (NBFCs) in India. 

The amount deposited in this kind of FD is deductible from your total income in the relevant financial year up to ₹1.5 lakhs. Additionally, these fixed deposits have a lock-in period of 5 years, during which you cannot withdraw the principal. 

How Does a Tax-Saving Fixed Deposit Work? 

A tax-saving fixed deposit works quite like a regular FD. You begin by opening an FD account with a bank or NBFC that offers this facility. Thereafter, you need to deposit the principal in the account. The upper limit on the amount you can invest in a tax-saving FD is ₹1.5 lakhs. The investment tenure is, by default, the lock-in period of 5 years. 

Over the course of the 5-year deposit period, you will earn interest on the amount deposited at the interest rate fixed by the bank or NBFC. You can choose to have the interest reinvested into the deposit, or you could opt for monthly or quarterly payouts — depending on your financial requirements and the terms and conditions of the bank. 

The principal deposited in a tax-saving fixed deposit can be claimed as a deduction from your total income during the relevant assessment year. This ceiling limit on the maximum permissible deduction, as per section 80C of the Income Tax Act, is ₹1.5 lakhs. This deduction decreases your total taxable income and thereby reduces your tax liability. 

At the end of the 5-year lock-in period, you can withdraw the amount deposited, along with accumulated interest, if any. 

Key Features of a Tax-Saver FD 

The key features of a tax-saving FD include the following.

  • Lock-in Period

Tax-saver FDs come with a mandatory lock-in period of 5 years, during which funds cannot be withdrawn. 

  • Tax Savings

Investments in tax-saver FDs qualify for tax exemption under section 80C of the Income Tax Act, with a deduction limit of ₹1.5 lakhs per financial year.

  • Interest Rates

The interest rates on tax-saving FDs are typically competitive. The interest rates are also higher for senior citizens.

  • Taxability of Interest

While the principal amount qualifies for tax exemption, the interest that you earn is subject to tax according to the tax slab applicable to you.

  • Investment Limit

There is usually a minimum and maximum investment limit, with the maximum capped at ₹1.5 lakhs as per section 80C limits.

  • Nomination Facility

Like in the case of a regular FD, you can also nominate beneficiaries for your tax-saving fixed deposit account.

  • No Loan Facility

Loans or overdraft facilities against these FDs are not available due to the mandatory 5-year lock-in period, during which liquidation is not allowed.

  • Renewal and Premature Withdrawal

At maturity, these FDs can be renewed. However, premature withdrawal is not allowed before the completion of the lock-in period.

  • Joint Account Option

These FDs can be opened jointly, but the tax benefit is available only to the primary FD account holder.

5+ Reasons to Open a Tax-Saving FD 

In case you are in the process of comparing different tax-saving investment options, here are 5+ reasons to consider opening a tax-saving fixed deposit. 

1. Secure Investment

Tax-saver FDs are low-risk investments that offer guaranteed returns. They provide a secure way to save and grow money without any uncertainty or volatility.

2. Tax Benefits

The primary attraction of tax-saving fixed deposits is the tax deduction on the investment amount. This makes such FDs a smart choice if you want to reduce your taxable income.

3. Fixed Returns

Unlike market-linked investments, tax-saving fixed deposits offer fixed returns, which are known with certainty at the time of investment. This makes financial planning easier.

4. Simplicity and Convenience

These FDs, offered by all major banks and NBFCs, are easy to open and manage. They also require only minimal documentation.

5. Planning for Long-Term Goals

The 5-year lock-in period encourages long-term savings discipline, which is beneficial for achieving long-term financial goals.

6. No Market Risk

Since tax-saving FDs are not market-linked investments, they are unaffected by stock market fluctuations and ensure stability in returns.

Documents Required to Open a Tax-Saving Fixed Deposit

To open a tax-saving fixed deposit, you need to generally submit the following documents as a part of the application or FD account opening process. 

  • Proof of identity like Aadhaar, PAN, voter ID, driving licence or passport
  • Proof of address like Aadhaar, passport, or telephone/electricity bills
  • A passport-sized photograph of the applicant
  • A cheque or demand draft (DD) for the intended deposit amount

Things to Keep in Mind When Opening a Tax-Saver FD

How to Save Tax on FD Interest?

Regardless of whether you have a regular or a tax-saving FD, the interest earned on the deposited amount is taxable as per the income tax slab rate applicable to you. Banks and NBFCs deduct tax at source if the interest earned on fixed deposits during the financial year exceeds ₹40,000 (or ₹50,000 for senior citizens). 

In case your total taxable income is below the basic exemption limit, you can file your income tax returns and request a refund of the tax deducted. However, if you want to save tax on FD interest and avoid the hassle of requesting a tax refund, you can submit Form 15G (or Form 15H if you are a senior citizen) to the bank. This will ensure that no tax is deducted at the source. 

Note: You can only file Form 15G or 15H if your total taxable income for the financial year does not exceed the basic exemption limit. 


The bottom line is that tax-saving fixed deposits may be suitable for you if you are a conservative investor with a lump sum amount ready to be invested. However, keep in mind that your funds will be tied up during the 5-year lock-in period and that any interest earned from your FD will be taxable unless you’ve taken the measures needed to save tax on the FD interest.


What are the minimum and maximum limits on the amount that can be invested in a tax-saver FD?

The minimum amount you can invest in a tax-saver FD varies between banks but is usually around ₹100 or ₹1,000. The maximum amount you can invest and claim as a deduction under section 80C is ₹1.5 lakhs in a financial year.

Are the interest earnings from a tax-saver FD taxable?

Yes, the interest earned on a tax-saving FD is taxable according to your income tax slab rates. This interest is subject to tax deducted at source (TDS) if it exceeds ₹40,000 (or ₹50,000 for senior citizens) in a financial year.

What are the interest rates on tax-saving FDs?

The interest rates on tax-saving fixed deposits vary between banks and are subject to periodic changes. Typically, they are higher for senior citizens. It’s advisable to check with individual banks for the current rates.

Can I avail of a loan against my tax-saving FD?

No, loans against tax-saver FDs are not permitted due to the mandatory lock-in period required for availing of the tax benefit.

How does a tax-saver FD compare to ELSS?

Tax-saving fixed deposits offer guaranteed returns and are less risky compared to equity-linked options like ELSS. However, they might offer lower returns compared to market-linked investments and are less flexible due to the lock-in period.