Tax-saving Fixed Deposits (FDs) are a popular investment option that allow individuals to claim tax deductions under Section 80C of the Income Tax Act, 1961. These deposits come with a mandatory five-year lock-in period and offer a fixed rate of return, making them a low-risk investment option for those looking to save on taxes while also ensuring financial security. Senior citizens enjoy an additional interest rate benefit, typically 0.5% higher than regular rates, making tax-saving FDs an attractive option for retirees looking for safe investments with better returns.
What you should know before investing in tax-saving FD
One of the key benefits of tax-saving FDs is the tax deduction of up to Rs 1.5 lakh every fiscal year under Section 80C. This reduces taxable income and lowers overall tax liabilities.
Unlike Equity-Linked Savings Schemes (ELSS) and other market-linked instruments, tax-saving FDs provide a consistent return as their interest rates remain fixed until maturity, offering predictability and security for investors.
Also read: Should you stop investing in PPF, SSY, NPS when switching to the new tax regime?Tax-saving FDs have a five-year mandatory lock-in period, which means that early withdrawals are not permitted. This encourages disciplined investment and discourages impetuous withdrawals.
DICGC Insurance Coverage
Investments in tax-saving FDs are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) for amounts up to Rs 5 lakh per depositor per bank, providing an additional layer of safety.
Interest earned on tax-saving FDs is taxable
While the principal investment qualifies for tax deduction, the interest earned on tax-saving FDs is fully taxable. The interest is added to the investor’s annual income and taxed according to the applicable income tax slab.
TDS on Interest
If the interest earned exceeds Rs 50,000 for senior citizens in a financial year, Tax Deducted at Source (TDS) at 10% is applicable. If PAN is not submitted, the bank will deduct TDS at 20%. Investors can submit Form 15G/15H to avoid TDS deduction if their total income is below the taxable limit.
No premature withdrawals
Unlike regular FDs, early withdrawals or loans against tax-saving FDs are not permitted. Investors must remain invested for the full five-year term.
No auto-renewal option
Tax-Saver FDs do not have an auto-renewal feature. Once the deposit matures, investors must either reinvest or withdraw the funds based on their financial goals.
Since the interest is taxable, investors should weigh their options and consider other tax-saving avenues before making an investment decision.
Here are banks offering 7.50% and above on tax saving FDs for senior citizens
| HDFC Bank | 7.50% |
| Axis Bank | 7.75% |
| Federal Bank | 7.60% |
| ICICI Bank | 7.5 |
| YES Bank | 8% |
| RBL Bank | 7.60% |
| IndusInd bank | 7.75% |
| DCB Bank | 7.90% |
| Bandhan bank | 7.50% |
Source: Bank website as of March 20, 2025.
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