Tax Saving Fixed Deposits (FD) Guide – Plus the Best Interest Rates

tax saving fixed deposits

A Fixed Deposit allows you to invest your money for a pre-determined period in return for a guaranteed interest rate on it.

Tax Saving FDs (also known as Tax Saver FDs) are no different but additionally they also allow you to save some taxes.

In this guide, I will cover all the key features and the most common questions about this popular investment option. I will also list the banks offering the best interest rates on these FDs.

So, let's get started...

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What is a Tax Saving Fixed Deposit?

A Tax Saver FD is nothing but a form of a Fixed Term Deposit.

It allows you to get a deduction under Section 80C of the Income Tax act 1961 and is made for a minimum of 5 years. This deduction is limited to INR 1.5 lakhs.

The minimum amount you need to invest to open this account is INR 100. The maximum amount is limited to 1.5 lakhs/annum.

Key Features​

Who all are allowed to open a Tax Saving FD?​

​All Resident Individuals, HUFs and Non-resident Indians are allowed to make use of this investment option.

​Joint accounts are allowed too, but only the first holder can claim the tax benefits.

​Ease of Opening and Operating

Amongst all the tax saving investment options, Tax Saving deposits are probably the easiest to open and operate. You can go to any government or the private bank and open this deposit.

Do note that as of now, cooperative banks can not ​offer tax saving FDs.

Fixed Returns

These fixed deposits, true to their name, guarantee a rate of return regardless of prevailing interest scenario. Essentially, the interest rate promised by the bank at time of deposit is what you will get for the whole duration of deposit.

These rates are decided by the banks and ​interest is typically compounded quarterly. Senior citizens will get a slightly higher interest rates. Check interest rate section for latest rates.

Investment is locked

Your investment is locked for the minimum duration of five years and you can't break it. Unlike other bank fixed deposit options, there is no facility of premature withdrawal for this investment option. And your money is locked-in for the entire tenure of the investment.

Further, there is no facility of taking a loan against a tax saving ​fixed deposit. So, only use money that you know, you won't need for next 5 years for purposes of this investment.

Investment Limit & Taxation treatment​

There is an overall limit of 1.5 lakhs per year beyond which you won't get any tax benefit from tax saving fixed deposits. The minimum amount is fixed at INR 100 for each year.

The investment amount is eligible for tax deductions under section 80C. In case of joint accounts, this benefit is only available to the first holder.​

Is the Interest on Tax Saving FD taxable?

Yes, the interest that you earn from this investment is fully taxable. Tax deduction is only applicable on the initial investment amount and not on the returns you get.

Also, like all FDs, the tax on interest income becomes due as the interest accrues to your account and not when you redeem your investment.

Banks will deduct a TDS at 10% rate if your total fixed deposit interest during a financial year is more than 10k. You will get a consolidated TDS certificate in Form 16A at the end of the year. You can use this certificate while filing your return.

However, you may have to pay additional taxes even after TDS has been deducted, as the tax liability on interest is basis your actual IT slab. So, essentially, even after paying 10% TDS, you may have to pay another 20% if you are in the highest bracket.

How to get an exemption on TDS?

If your overall income is less than statutory tax limits, you can get an exemption from automatic deduction of TDS.

For this you will have to fill and submit Form 15G/H to your bank to instruct them to not deduct taxes. Please note that these forms are only valid for one year and in the next financial year, you will have to submit these forms again.

How to open a senior citizen tax saving FD?

It's actually same as opening up any other FD. All you need additionally is a proof of your age. Any of following documents should work well:

  • Voters Identity Card
  • Birth Certificate
  • Passport
  • Pan Card
  • Senior Citizen Card issued by the Railways
  • Any PSU/Defense/Government ID card having photo, signatures and date of birth
  • SSLC certificate (10th class)
  • LIC Policy
  • Pension Payment Order

What are current Tax Saving FD interest rates?

The current interest rates for these FDs are ranging between 6% to 7.2% per annum. Just like normal FDs, senior citizens get a slightly higher interest as compared to normal accounts.

The exact rates differ by each bank and are typically decided basis prevailing 5 year deposit rates.

Current Tax Saving FD Interest Rates for Top 10 Banks

Bank

Scheme

Normal Interest Rate

Senior Citizen Rate

SBI​​​

SBI Tax Saving Scheme 2006

6.25%

6.75%

ICICI

ICICI Bank Tax Saver Fixed Deposit

6.50%

7.00%

HDFC

HDFC Bank Tax Saver Fixed Deposit

6.00%

6.50%

Axis

Axis Bank Tax Saver Fixed Deposit

6.25%

6.75%

Punjab National Bank

PNB Tax Saver Fixed Deposit Scheme

6.25%

6.75%

Canara Bank

Canara Tax Saver Scheme

6.00%

6.50%

Bank of Baroda

Baroda Tax Savings Term Deposit

6.25%

6.75%

Union Bank of India

Union Tax Saver

6.50%

7.00%

IDBI Bank

Suvidha Tax Saving Fixed Deposits

6.00%

6.50%

Bank of India

Star Sunidhi Tax-Saving Deposit Scheme

6.25%

6.75%

Updated as of Jan 18

These interest rates change very frequently. But you can easily get the latest rates on bank websites. Refer next section for the exact website links.

The interest on these deposits is typically calculated and credited on a quarterly basis.

Which Bank offers the highest interest on tax saving FDs?

If you are willing to look beyond top banks, you may find some options that will offer you much higher interest rates on these fixed deposits. Let's look at top 6...

Top 6 Banks offering the highest interest rate on tax saving FDs

Bank

Scheme

Normal Interest Rate

Senior Citizen Rate

IDFC Bank

IDFC Tax Saving Fixed Deposits

7.20%

7.70%

DCB Bank

DCB Bank Tax Saver FD

7.10%

7.60%

RBL Bank

RBL Tax Saving Scheme

7.10%

7.60%

Tamilnad Mercantile Bank

TMB TSD (Mullai)

6.90%

7.40%

Karur Vysya Bank

KVB – Tax Shield Deposits

7.00%

7.00%

Lakshmi Vilas Bank

Lakshmi Tax Saver Deposits

7.00%

7.00%

Updated Jan 18

IDFC Bank is a private sector bank in India that actually started its operations recently (October 2015). It is part of IDFC group that has been providing banking and financial services since long. This bank offers an interest rate of 7.20% as the standard rate and 7.70% for senior citizens.

DCB Bank is a private sector scheduled commercial bank in India. DCB Bank currently offers 7.10% on a normal tax FD and 7.60% for senior citizens.

RBL Bank (or Ratnakar Bank) is a scheduled commercial bank headquartered in Maharashtra and is one of the oldest private sector banks in India. It offers 7.10% for normal FDs and 7.60% for senior citizens.

Tamilnad Mercantile Bank, Karur Vysa and Lakshmi Vilas Bank are other names offering top rates on tax saving FDs.

What are alternatives to Tax Saving FD?

​Tax saver FDs are amongst the most popular investment schemes from an IT exemption perspective. But there are other options that may just fit your investment goals better.

​4 alternatives to Tax Saving Fixed Deposits

  • ​Public Provident Fund (PPF)
  • National Savings Certificate (NSC)
  • Senior Citizen Saving Scheme (SCSS)
  • ELSS Mutual Funds

How does Tax saving FD compare to its alternatives?

Tax Saving FD vs PPF

PPF is another really popular investment option. PPF comes under EEE regime, which means that the initial investment, the interest that you earn and the final maturity amount, all are tax free. In comparison, for Tax saving funds, while the initial investment is tax free, the interest is not.

While the rates for both PPF and Tax Saver FDs are in similar ranges right now (PPF's current interest rate is 7.9%), PPF offers better effective returns because of the complete taxation rebate on interest.

PPF, however, comes with an extra lock-in period. Compared to Tax FD's lock-in period of 5 years, in case of PPF, your money is locked in for 15 years. You will get a loan and partial withdrawal facility for the PPF, which compensates for it partially.

As you may already know, I strongly recommend having a PPF account and using that for your IT deduction investments.

Tax Saving FD vs NSC

National Savings Certificate or NSC is another government backed small savings scheme.

There are two issues in operation right now - NSC VIII and NSC IX. NSC VIII comes with a lock-in of 5 years while NSC IX comes with a tenure of 10 years.

The interest on NSCs is fully taxable just like it is on a tax-saving FD. However, there is no TDS that's deducted in case of NSCs while it will be deducted for tax saver FDs.

NSCs are only available at post office, unlike tax saver FDs which are available with most banks as well as post offices.

Tax Saving FD vs Senior Citizen Saving Scheme

Senior Citizen Saving Scheme is another government backed investment scheme, available at banks as well as post offices. But unlike tax-saving fixed deposits, this scheme is only available to senior citizens.

SCSS will credit monthly interest to your account while in case of Tax Saver FDs, you get the interest alongside your final maturity amount.

SCSS allows a premature withdrawal while Tax Savings FD doesn't. SCSS also earns a higher interest rate.

Tax Saving FD vs ELSS

ELSS stands for equity linked savings scheme. These are equity mutual funds and any investment made in these investment vehicles is eligible for tax deduction for up to 1.5 lakhs/annum.

ELSS typically will offer much higher returns, but it also is much more volatile and comes with higher risks. The average long term returns from top ELSS schemes will be upwards of ~15%. These returns being equity returns are considered as long term capital gains and won't be taxed.

Also, ELSS is only locked-in for a period of 3 years as against 5 years in the case of Tax Savings FDs.

My Recommendation


If you want rapid portfolio growth and are ok with inherent equity risk, go for ELSS.


If you want only fixed income investments, but are ok with a longer duration lock-in, there is nothing that beats PPF.


If you want a shorter lock-in and are >60 years of age, you should opt for SCSS which will offer you a monthly interest income.


Go for tax saving FDs, if you value convenience over everything else. None of the alternatives (except maybe ELSS) beat how easily and quickly, you can invest in fixed deposits.

Also, what is the difference between Tax Saving Fixed Deposit and Tax Free Bond?

Both Tax Free Bonds and Tax-Saving Fixed Deposits will give you a guaranteed return.

​The difference lies in the fact that for Tax Free Bonds, you can't claim the deduction of your initial investment under section 80C. Also, the interest earned from these bonds is completely tax-free.

​Essentially, these bonds are under the TEE regime (Taxed, Exempt, Exempt).

Tax free bonds are issued for 10 years or more. But these bonds are tradeable in the secondary market so they are much more liquid as compared to tax savings fixed deposits.​

Summary of Tax Saving FDs

  1. A minimum maturity period of 5 years. No premature withdrawal before 5 years.
  2. Up to 1.5 lakhs INR deduction allowed under Section 80C
  3. Interest earned on these FDs is taxable
  4. Individuals, HUFs and NRIs, all are allowed to invest. It can be an individual or a joint account.
  5. You can transfer these FDs from one bank branch to another.

And that's all... That will be the conclusion of this guide.

I have tried to cover all key aspects for tax saving FDs but if you have any questions, let me know...

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