What is Tax Saving Fixed Deposit (FD)? Know the FD benefits & Rates in India

Written by : Knowledge Centre Team

2026-08-07

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10 minutes read

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Saving taxes is an important aspect of financial planning, and several investment options can help reduce your taxable income while encouraging disciplined savings. Among these, tax-saving fixed deposits (FDs) remain a popular choice for investors seeking stable returns with relatively low risk. Although they may not offer returns comparable to market-linked investments, they provide capital protection and can help eligible taxpayers claim deductions under the applicable provisions of the Income Tax Act.

If you're considering a secure investment that also offers tax benefits, understanding how tax-saving fixed deposits work is essential. This blog explains “what is tax-saving FD?”, its features, tax implications, and whether it is the right investment option for your financial goals.

Key Takeaways

Tax-saving fixed deposits (FDs) provide tax deductions under Section 123 of the Income Tax Act of ₹1.5 lakh per year
These FDs come with a lock-in period of five years and do not allow premature withdrawals, loans, or overdrafts
Though the interest is taxed, the principal amount is exempt from tax
Senior citizens are eligible for one more deduction of ₹50,000 under Section 153
Comparing interest rates, lock-in periods, and tax benefits across investment options can help in selecting the most suitable tax-saving instrument

What is aTax-Saving Fixed Deposit?

Tax-Saving Fixed Deposits (FDs) are special savings schemes that help individuals save on taxes while earning interest. Under Section 80C of the Income Tax Act, 1961, investors can claim a tax deduction of up to ₹ 1.5 lakh per year by investing in these FDs. However, Tax Saving FDs come with a lock-in period of 5 years, meaning you can't withdraw the invested amount during this time. The interest rate for tax-saving FDs varies from bank to bank, and the interest earned on them is considered taxable income. Further, senior citizens i.e., individuals aged equal to or above 60 years) can claim an additional tax deduction. It comes under Section 153 (formerly Section 80TTB) of the Income Tax Act and can be up to ₹50,000 on the interest income of deposits.

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Features of Tax Saving Fixed Deposit

Tax-saving fixed deposits are designed to help investors save taxes while earning guaranteed returns. Before investing, it is important to understand their key features and how they can influence your overall financial planning.

Tax Deduction Benefits: Investments in tax-saving fixed deposits are eligible for a deduction of up to ₹1.5 lakh under Section 123 (previously Section 80C) of the Income Tax Act, 2025, subject to the applicable conditions.
Mandatory Five-Year Lock-in: These fixed deposits come with a compulsory 5-year lock-in period, during which premature withdrawal is generally not permitted.
Minimum Investment Amount: Most banks allow you to open a tax-saving fixed deposit with a minimum investment of ₹1,000, while there is generally no upper investment limit. However, the tax deduction is restricted to the prescribed limit.
Flexible Interest Payout Options: Depending on the bank, investors can choose to receive interest on a monthly, quarterly, half-yearly, or cumulative basis.
Taxable Interest Income: While the principal qualifies for tax deductions, the interest earned is taxable under the head "Income from Other Sources" and is taxed according to the investor's applicable income tax slab. TDS may also apply as per prevailing tax rules.
No Auto-Renewal Facility: Unlike regular fixed deposits, tax-saving FDs generally do not renew automatically upon maturity; investors must reinvest separately if required.
No Loan or Overdraft Facility: Most banks do not permit loans, overdrafts, or premature withdrawals against tax-saving fixed deposits during the lock-in period.
Premature Closure Restrictions: Premature closure is generally not allowed before age 5, except in specific situations, such as the depositor's death, subject to the bank's policy.
Single and Joint Accounts: Tax-saving FDs can be opened individually or jointly. However, the tax deduction is available only to the first account holder who contributes to the investment.

Did You Know?

Deposits with scheduled commercial banks in India grew by 10.6% year-on-year in FY 2024-25, reflecting continued preference for fixed-income savings

Source: ET

$Cut Tax Stress 46,800$

Benefits of Tax Savings FDs Over Other Methods

Several investment options offer tax benefits under the Income Tax Act. However, tax-saving fixed deposits may be suitable for investors who prioritise capital protection and predictable returns. The table below highlights how they compare with other popular tax-saving investments.

Equity Linked Savings Scheme (ELSS) is a viable option with a lower lock-in period and minimum investment. However, fixed deposits offer no risk from market dynamics due to a fixed interest rate, unlike ELSS.
Public Provider Fund (PPF) is another safer option. However, the downside is the presence of a lock-in period of 15 years compared to 5 years of fixed deposits.
The National Pension System (NPS) is also an option with higher returns and partial taxation of returns. But the lock-in period here again is lengthy, i.e., till retirement.

Feature	Tax-Saving FD	ELSS	PPF	NPS
Risk Level	Low	Market-linked	Low	Moderate (depends on asset allocation)
Lock-in Period	5 years	3 years	15 years	Until retirement (with partial withdrawals permitted under specified conditions)
Returns	Fixed and guaranteed	Market-linked	Government-declared	Market-linked
Tax Benefits	Eligible under Section 123 (formerly Section 80C)	Eligible under Section 123	Eligible under Section 123	Eligible under applicable provisions
Suitable For	Conservative investors	Investors seeking long-term wealth creation	Conservative investors	Retirement planning

Should You Invest in a Tax-Saving Fixed Deposit?

A tax-saving fixed deposit can be a suitable investment option for individuals seeking tax benefits along with stable, low-risk returns. The investment is beneficial for you in the following situations:

Need for Tax Savings: Tax-saving fixed deposits are eligible for deductions under Section 123 (previously Section 80C) of the Income Tax Act, subject to the prescribed limits, making them suitable for individuals looking to reduce their taxable income
Preference for Low-Risk Investments: Investors seeking capital protection and guaranteed returns may find tax-saving FDs suitable, as they are not affected by market fluctuations
Long-Term Savings Goals: The mandatory five-year lock-in period encourages disciplined investing and can support medium- to long-term financial objectives
Portfolio Diversification: Tax-saving fixed deposits can complement market-linked investments by adding stability and reducing the overall investment risk within a diversified portfolio
Limited Liquidity Requirements: As premature withdrawals are generally not permitted during the lock-in period, these deposits are suitable for individuals who do not require immediate access to their invested funds
Preference for Simple Investment Products: Tax-saving fixed deposits involve a straightforward investment process, making them suitable for investors who prefer uncomplicated financial products
Suitable for Conservative Investors: Individuals prioritising capital preservation over potentially higher, market-linked returns may find tax-saving fixed deposits a suitable investment option

Eligibility for Tax-Saving Fixed Deposit

Tax-saving fixed deposits are available under various term deposit schemes offered by banks and financial institutions. They are well-suited for individuals belonging to the following categories:

Business owners or Self-employed individuals
Salaried employees
Resident individuals
Hindu Undivided Families (HUFs), subject to the applicable provisions of the Income Tax Act
Professionals who pay income tax

The aspects to consider for eligibility in this tax saver scheme encompass:

Individual or HUF Accounts: Tax-saving fixed deposits can be opened in an individual's name for himself or in the capacity of the Karta of a Hindu Undivided Family (HUF)
Joint Accounts: Tax-saving FDs may also be opened jointly, depending on the bank's policies. However, the tax deduction is generally available only to the first account holder, provided they meet the prescribed eligibility conditions
Five-Year Lock-in Period: The investment must remain locked in for five years to qualify for the applicable tax benefits

Document Requirement for Tax-Saving Fixed Deposit

Before opening a tax-saving fixed deposit, ensure that the required documents are readily available to facilitate a smooth application process. The following documents are generally required:

Proof of Identity: PAN Card, Aadhaar Card, Passport, Voter ID, Driving Licence, or any other Officially Valid Document (OVD) accepted under KYC norms
Proof of Address: Aadhaar Card, Passport, utility bill (such as electricity, water, or piped gas), bank statement, or any other officially accepted proof of address
PAN Card: Required for tax compliance and reporting purposes. If PAN is not available, Form 60 may be accepted, subject to the bank's policies
Recent Passport-Sized Photograph: Required for completing the account opening process, if applicable
Duly Filled Application Form: The prescribed fixed deposit application form provided by the bank or financial institution

Conclusion

Tax-saving fixed deposits are among the safest and simplest ways to save on taxes. With a five-year investment lock-in period, these offer tax benefits under Section 123 of the Income Tax Act, 2025. Although the interest earned is taxable and the lock-in period limits liquidity, tax-saving FDs provide capital protection and predictable returns. Before investing, compare interest rates, review the terms offered by different banks, and ensure the investment aligns with your financial goals, risk appetite, and overall tax planning strategy. The hassle-free method can be your choice for a well-planned budget or as a last-minute resort to save taxes.

Glossary

Lock-in Period: The mandatory period during which funds cannot generally be withdrawn from a tax-saving FD
Income Tax Slab: The structure of tax rates against various ranges of income under the New and Old tax regimes
Section 123: A provision of the Income Tax Act for deduction up to ₹1.5 lakh for particular investments
TDS (Tax Deducted at Source): Tax deducted by the bank on eligible interest income before it is credited to the investor
Hindu Undivided Family: A separate taxable entity recognised under Indian tax laws that can invest in eligible tax-saving instruments

FAQs

Income tax is applicable to the interest earned on the fixed deposit. The principal amount invested and returned on maturity is not taxable, although the investment may qualify for a deduction under Section 123 (previously called Section 80C), subject to the applicable limit.

The amount you should invest depends on how much of the deduction limit under Section 123 (previously called Section 80C) you have already utilised. If you have not exhausted the eligible deduction limit, you can invest accordingly to maximise your tax benefits. However, remember that tax-saving fixed deposits have a 5-year lock-in period, so invest only an amount that aligns with your financial goals.

A tax saver FD comes with a mandatory five-year lock-in period and allows eligible investors to claim tax deductions under Section 123 (formerly Section 80C) of the Income Tax Act. A regular fixed deposit generally offers greater flexibility in tenure and premature withdrawals, but does not provide the same tax benefit as a fixed deposit.

No. A 5-year tax-saving fixed deposit qualifies for tax deductions on the invested amount, subject to the prescribed limit. However, the interest earned is taxable according to the investor's applicable income tax slab, and TDS may apply as per prevailing tax rules.

The principal amount invested in a tax-saving FD is generally not taxable. However, the interest earned on the deposit is taxable under the head "Income from Other Sources" and is taxed according to the investor's applicable income tax slab.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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What are Tax-Saving Fixed Deposits?

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Key Takeaways

What is aTax-Saving Fixed Deposit?

Save Taxes While Building Long-Term Wealth

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Features of Tax Saving Fixed Deposit

Did You Know?

Benefits of Tax Savings FDs Over Other Methods

Should You Invest in a Tax-Saving Fixed Deposit?

Eligibility for Tax-Saving Fixed Deposit

Document Requirement for Tax-Saving Fixed Deposit

Conclusion

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