When it comes to saving taxes while securing guaranteed returns, Tax-Saving Fixed Deposits (FDs) are one of the most popular choices among Indian investors. These FDs not only offer steady interest rates but also provide significant tax benefits under Section 80C of the Income Tax Act, 1961. But with numerous banks offering various interest rates, how do you know which tax-saving FD suits your financial goals the best?
Best Tax-Saving FDs
| Feature | Details |
|---|---|
| Eligible Tax Benefit | Deduction up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961 |
| Lock-in Period | 5 Years |
| Interest Rates (General Citizens) | 6.25% to 8.80% (varies by bank) |
| Interest Rates (Senior Citizens) | 6.75% to 9.30% (varies by bank) |
| Minimum Investment | ₹1,000 (varies by bank) |
| Premature Withdrawal Allowed? | No, withdrawals before 5 years not permitted |
| Loan Against FD Allowed? | No, during lock-in period |
| Taxability of Interest Earned | Interest is fully taxable as per your income tax slab |
Tax-saving FDs are an excellent, low-risk tool to reduce your taxable income while enjoying guaranteed returns. However, they may not be ideal if liquidity or higher returns are your priorities. Always compare rates, consider alternative tax-saving options, and align your investment with your financial goals.
What Are Tax-Saving FDs?
A Tax-Saving FD is a special type of fixed deposit account where you invest a lump sum for a lock-in period of five years. In return, you earn a fixed interest rate and enjoy tax benefits on the principal amount up to ₹1.5 lakh annually under Section 80C.
These FDs are ideal for risk-averse investors who prioritize capital protection, steady returns, and tax savings over high-risk market instruments like mutual funds or stocks.
Key Features of Tax-Saving FDs:
- Fixed lock-in period of 5 years.
- Guaranteed returns with fixed interest rates.
- Available for both individuals and Hindu Undivided Families (HUFs).
- Interest payout options: monthly, quarterly, or cumulative (at maturity).
- No premature withdrawal or loan facility during lock-in.
see also: How Much Return You Will Get by Depositing Rs 1 Lakh to Rs 10 Lakh in Post Office FD
Latest Tax-Saving FD Interest Rates in 2025
Here’s a detailed comparison of some of the best banks offering competitive interest rates:
| Bank Name | Interest Rate (General) | Interest Rate (Senior Citizen) |
|---|---|---|
| State Bank of India (SBI) | 6.50% | 7.50% |
| Punjab National Bank (PNB) | 6.50% | 7.00% |
| HDFC Bank | 7.00% | 7.50% |
| Axis Bank | 7.10% | 7.75% |
| IDFC First Bank | 7.75% | 8.25% |
| YES Bank | 7.75% | 8.25% |
| IndusInd Bank | 7.85% | 8.25% |
| RBL Bank | 8.00% | 8.50% |
| DCB Bank | 8.00% | 8.60% |
| Suryoday Small Finance Bank | 8.25% | 8.75% |
| Shriram Finance | 8.80% | 9.30% |
Rates are subject to periodic revision. Always check official bank websites for updated rates.
How Do Tax-Saving FDs Reduce Your Tax Liability?
The primary advantage of tax-saving FDs is the Section 80C deduction benefit. Here’s how it works:
Example:
If your annual income is ₹8 lakh, and you invest ₹1.5 lakh in a tax-saving FD, your taxable income reduces to ₹6.5 lakh. This leads to a significant reduction in your tax liability based on the applicable tax slabs.
Important: While the principal amount invested is tax-deductible, the interest earned is fully taxable and added to your total income.
Step-by-Step Guide: How to Open a Tax-Saving FD
Step 1: Choose the Right Bank
Evaluate interest rates, credibility, customer service, and digital accessibility of banks.
Step 2: Select Investment Amount
Decide how much you wish to invest, up to ₹1.5 lakh to maximize the tax benefit.
Step 3: Choose Interest Payout Mode
Select whether you’d prefer interest payouts monthly, quarterly, or cumulative.
Step 4: Submit KYC Documents
Provide PAN, Aadhaar, and address proof for verification.
Step 5: Deposit the Funds
Deposit the selected amount via cheque, cash, or online transfer.
Pros & Cons of Tax-Saving FDs
Advantages:
- Risk-free investment with guaranteed returns.
- Tax benefits under Section 80C.
- Easy to open with minimal documentation.
- Suitable for conservative investors.
Disadvantages:
- Lock-in period restricts liquidity.
- Interest is taxable.
- Returns are lower compared to ELSS mutual funds or PPF.
see also: Sukanya Samriddhi Yojana to Mutual Fund SIP Top Investment Options
Alternative Tax-Saving Investment Options
| Option | Lock-In Period | Returns | Risk Level |
|---|---|---|---|
| Public Provident Fund (PPF) | 15 Years | 7.1% (tax-free) | Very Low |
| National Savings Certificate | 5 Years | 7.7% (taxable) | Low |
| Equity Linked Savings Scheme | 3 Years | Market-linked (12%-15% avg) | High |
| Sukanya Samriddhi Yojana | 21 Years | 8.2% (tax-free) | Very Low |
Best Tax-Saving FDs FAQs
1. Is the interest earned on tax-saving FD tax-free?
No, the interest earned is fully taxable based on your income tax slab.
2. Can I withdraw tax-saving FD before 5 years?
No, premature withdrawals are not allowed before the 5-year lock-in period ends.
3. Is TDS applicable on tax-saving FD interest?
Yes, TDS is deducted if the interest earned exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year.
4. Which bank offers the highest interest rate on tax-saving FD in 2025?
Currently, Shriram Finance offers one of the highest rates at 8.80% for general citizens and 9.30% for senior citizens.
5. Can senior citizens invest in tax-saving FDs?
Yes, senior citizens can invest and enjoy higher interest rates.
