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What is Tax Saving Fixed Deposit?

What is Tax Saving Fixed Deposit?
January 10, 2024


In India, fixed deposit is considered one of the safest means of investment. Many people use FDs to store wealth over a long time due to their flexibility and guaranteed returns. To make fixed deposits more attractive, banks offer a special type of FD scheme called tax-saver FDs which allows the investor to claim deductions under 80C of the Income Tax Act. 

Here in this article, we will deep dive into tax-saving fixed deposits, features, benefits, other tax-saving strategies and much more.

What Is a Tax Saving FD?

Tax saving fixed deposits refers to a special kind of FD account which allows the account holder to claim tax deductions under Section 80C of the Income Tax Act on the amount of investment. The amount of deduction can be a maximum of Rs. 1.5 lakh in a fiscal year. However, all tax-saver FDs come with a lock-in period of 5 years; hence premature withdrawal is not allowed during the lock-in period of 5 years.

However, the interest that you earn from these deposits is fully taxable and the rate of interest of a tax-saving fixed deposit varies from bank to bank. If you are looking for a low-risk saving investment option to reduce your taxable income, tax-saver FDs can be the best option out there.

How Does Tax Saving Fixed Deposit Work?

Similar to a normal fixed deposit account, you will have to make a lump sum deposit in a tax-saving FD and choose the tenure as per your financial goals. Depending on the tenure of your deposit, you will receive a fixed interest throughout the tenure irrespective of any interest rate fluctuations.

However, unlike a regular fixed deposit, a tax-saving FD does not allow auto-renewal and comes with a five-year lock-in period during which no withdrawals are permitted.

What Are the Features of Tax-saving FDs?

Give are some noteworthy features of a typical tax-saving fixed deposit:

  • There is a total lock-in period of 5 years, when you cannot make premature withdrawals. 

  • A tax-saver FD doesn't come with an auto-renewal facility.

  • The interest earnings are taxable and deducted at source.

  • It enables the account holder to reduce their yearly taxable income up to Rs. 1.5 lakh under Section 80C of the Income Tax Act#.

  • It can be operated in a single mode or jointly. However, in the case of a joint tax saving fixed deposit, only the first account holder will be eligible for tax deductions.

  • The interest rate offered remains fixed throughout the 5-year tenure.

  • One can choose a monthly, quarterly interest pay-out option or reinvest the interest with principal upon maturity.

What Are the Advantages of a Tax Saving FD?

Listed below are some of the advantages of investing in a tax-saving fixed deposit:

  • Higher Returns:

    With a tax-saving fixed deposit, the account holder can enjoy higher returns compared to a savings bank account.
  • Tax Savings:

    It allows you to enjoy tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.
  • Flexible Deposit Amount:

    It offers flexibility i.e. the investor can choose the deposit amount as per his or her convenience.
  • Secured Investment Option:

    A bank FD is considered as one of the safest investment options available in the market; hence the same goes for a tax-saving fixed deposit. Also, DICGC provides an insurance cover of up to Rs. 5 lakh on both the principal and interest amount of a deposit. 
  • Assured Returns

    There are many investment options available in the market that provide fluctuating returns based on market movement. Meanwhile, a tax-saving FD offers a fixed interest rate throughout the tenure as promised.
  • Savings Habit:

    Investing in a tax saving fixed deposit inculcates a savings habit within a young investor helping in reducing unnecessary spending habits.  Also, the lock-in period helps in preventing frequent immediate withdrawals for unnecessary spending.

Who Should Invest in Tax Saving Fixed Deposits?

Any individual person or a member of a Hindu Undivided Family (HUF) is eligible to make an investment in a tax-saving fixed deposit. Investment can be made through any commercial bank- public or private, other than a cooperative or a rural bank. The mode of operation of such accounts can be either “single” or in a joint mode.

Please note that in the case of a 'joint' FD, only one holder- the first account holder is eligible to avail the tax benefits.

How Can We Avoid Tax Deductions on FD?

  • Submission of Form 15G or 15H:

    Submission of Form 15G or Form 15H (for senior citizens) declares that you possess no taxable income; the bank will not make TDS deductions on the interest earned.
  • Strategic FD Timing:

    To prevent tax deduction, time your fixed deposit so that the interest accrued in any financial year does not exceed Rs. 40,000 (Rs. 50,000 if you are a senior citizen).
  • FD Splitting:

    You can save on taxes by initiating one FD under your own personal account and another bank account as a member of an HUF. Using this approach will ensure that both the FDs are treated separately for taxation. 

What Are the Documents Required for Tax Saving Fixed Deposit?

Here are the documents required for opening a tax-saving fixed deposit:

1. Identity proof (any of the following)

  • Passport

  • Aadhaar card

  • Driving license

  • Voter ID card

2. Proof of address (any of the following)

  • Aadhaar card

  • Driving licence

  • Passport

  • Utility bills

3. Age proof (for senior citizens)

  • PAN card

  • Aadhaar card

  • Voter ID card

  • Birth certificate

4. Recent photographs (passport-size)

Taxation On FD Earnings

The primary tax benefit available with a tax saver FD is that you can avail deductions of up to Rs. 1.5 lakh under Section 80C#. However, the interest earnings are fully taxable.

The interest earned on a tax-saving fixed deposit is fully taxable just like a regular FD and the tax is deducted at source. A 10% TDS is applicable on the interest amount if the interest earnings in a year exceed Rs. 40,000 and this limit is increased to Rs. 50,000 for senior citizens. However, if your total income falls below the minimum tax slab in such a case, you can submit Form 15G or Form 15H to prevent TDS deduction for your interest earnings.

To sum up, tax-saving deposits allow you to save taxes while earning assured returns. However, as a smart investor, you must keep certain things in mind before investing. This includes the restriction of premature withdrawal for 5 years, no overdraft facilities allowed against tax saving FD and the Rs. 1.5 lakh limit of investment amount allowed in a financial year. 

FAQs about Tax Saving Fixed Deposit?

1. Is 5 years FD tax-free?

No, the interest in a 5-year tax saving FD is fully taxable and deducted at source. However, you can avail a tax deduction of up to Rs. 1.5 lakh under Section 80C# on making an investment.

2. Are there any tax benefits associated with a tax-saving FD?

Yes, you can avail a tax benefit of up to Rs. 1.5 lakh u/s 80C on investing in a tax-saving fixed deposit account.

3. What is the minimum amount required to open a tax-saving FD account?

The minimum amount required to open a tax-saving FD account is Rs. 100; However, this value varies from bank to bank.

4. What is the investment limit for a tax-saving FD?

The minimum investment limit is Rs. 100 (though it varies from bank to bank) and the maximum limit is Rs. 1.5 lakh in a financial year.

5. How can I avoid income tax on my FD?

If your interest income is more than Rs. 40,000 (Rs. 50,000 for senior citizens), TDS will be applicable. But in case your income is below the minimum tax slab, you can submit Form 15G (Form 15H for senior citizens) to avoid a TDS deduction from your interest income.

6. What is the tenure of a tax-saving FD?

A tax-saving fixed deposit comes with a lock-in period of 5 years and no premature withdrawals are allowed during this period.

7. What happens at the time of maturity of a tax-saving FD?

Upon maturity, the entire maturity value will be transferred to your linked savings account.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.

# Subject to conditions specified u/s 80C of the Income tax Act, 1961.
The afore stated views are based on the current Income-tax law. Also, the customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.