Exploring the Advantages of Tax Saving Fixed Deposits

When it comes to investment instruments, different options appeal to different people based on their risk tolerance, investment horizon, and financial goals. Among the many investment alternatives available, one that is particularly popular in India due to its low risk and tax benefits is the Tax Saving Fixed Deposit (FD). With the objective of promoting saving and investment among individuals, the Indian Government has introduced a variety of tax incentivized schemes. One such option that offers a mix of safety, returns and tax-saving is the Tax Saving Fixed Deposit.

Tax saving fixed deposits are a type of fixed deposit scheme offered by banks and non-banking financial companies (NBFCs) in India. The primary feature that differentiates it from regular FDs is that under section 80C of the Income Tax Act, it offers tax benefits for investments up to INR 1.5 lakhs in a financial year.

One of the main advantages of tax saving fixed deposits is that they offer guaranteed returns. The rate of interest is predetermined at the time of opening the account, and these rates are usually higher than those offered by savings accounts. Currently, the interest rates on tax saving FDs range from 5.5% to 7.5% per annum, with senior citizens typically receiving higher interest rates.

Another advantage is the safety and security it offers. Unlike market-linked investment products, the returns from tax saving FDs are not influenced by market volatilities. Since they are primarily offered by banks and NBFCs, they also provide a higher level of security. In case of bank defaults, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures deposits up to INR 5 lakhs per depositor per bank.

The lock-in period of 5 years for tax saving FDs could also be seen as an advantage as it enforces a disciplined approach to savings. Moreover, it encourages long-term investment, which is often recommended for wealth accumulation. After the lock-in period, the investor is free to either withdraw the funds or reinvest them.

Even though tax saving FDs are not linked to the market, they generate higher returns than a savings account. For instance, if one invests INR 1.5 lakhs in a tax saving FD offering 7.5% interest, in 5 years, the maturity amount would be approximately INR 2,11,370 – an earning of INR 61,370.

However, it is crucial to consider certain limitations of tax saving FDs. They come with a compulsory lock-in period of 5 years and premature withdrawal or loan against these FDs is not allowed. The returns earned are taxable as per the individual’s income tax slab, except for the amount invested which is eligible for a deduction under Sec 80C.

In conclusion

Tax Saving FDs are an excellent investment option for risk-averse individuals looking for guaranteed returns with the benefit of tax savings. It is advisable to consider all the pros and cons, align it with your financial goals, and actively seek professional advice if needed before making any investment decisions.

Disclaimer: This article is for informational purposes only and not intended as a recommendation or an endorsement of any financial product. Investments in the Indian financial market are subject to market risks, and investors must carefully evaluate all the pros and cons before making any investment decisions.


Tax Saving Fixed Deposits are an increasingly popular investment instrument in India, thanks to the blend of returns, safety, and tax benefits they offer. Backed by the Indian Government, they are a low-risk option that ensures guaranteed returns along with tax savings under section 80C of the Income Tax Act. The appeal lies in the higher interest rates than savings accounts, and the safety net provided by the DICGC. Notwithstanding its advantages, the tax Saving FDs do come with a lock-in period of 5 years and tax implications on the returns earned. Therefore, it is always wise for prospective investors to evaluate all the pros and cons before committing their funds into this investment avenue.

Remember, investment decisions should always be aligned with individual financial goals and risk appetite, potentially with the aid of professional advice.