Tax-saving FDs: Interest rates touch 8.60%; here's how they work and who should invest

Tax-saving fixed deposits (FDs) remain a popular choice for investors seeking guaranteed returns while reducing their tax liability under Section 80C of the Income Tax Act. With several banks offering attractive interest rates and a mandatory five-year lock-in, these deposits continue to appeal to conservative investors despite the growing popularity of market-linked tax-saving options.

Investments in tax-saving FDs qualify for a deduction of up to ₹1.5 lakh under Section 80C. However, unlike Equity Linked Savings Schemes (ELSS), the interest earned on these deposits is taxable according to the investor's income tax slab.

Interest rates vary across banks

Interest rates on tax-saving FDs currently range from around 6% to 7.75% for most scheduled commercial banks, while some small finance banks are offering significantly higher returns.

Among major private lenders, HDFC Bank, ICICI Bank and Axis Bank offer 7% annual interest for general citizens. YES Bank and IndusInd Bank offer 7.25%, while RBL Bank and Federal Bank provide up to 7.10%.

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In the public sector, Bank of Baroda offers 6.80%, while State Bank of India (SBI) and Punjab National Bank (PNB) provide 6.50% for general depositors.

Small finance banks continue to lead the interest rate chart. Suryoday Small Finance Bank offers the highest rate of 8.60% for general citizens and 9.10% for senior citizens. Unity Small Finance Bank offers 8.15%, Jana Small Finance Bank 8.20%, and North East Small Finance Bank 8%.

Senior citizens generally receive an additional 0.50 percentage point interest over regular rates across most banks.

Top Tax-Saving FD Interest Rates (5-Year Tax Saver Deposits)
 

Bank	General Citizens	Senior Citizens
Suryoday Small Finance Bank	8.60%	9.10%
Jana Small Finance Bank	8.20%	8.20%
Unity Small Finance Bank	8.15%	8.65%
North East Small Finance Bank	8.00%	8.50%
SBM Bank	7.75%	8.25%
Utkarsh Small Finance Bank	7.75%	8.35%
YES Bank	7.25%	8.00%
IndusInd Bank	7.25%	7.75%
Dhanlaxmi Bank	7.25%	7.75%
AU Small Finance Bank	7.25%	7.75%
Equitas Small Finance Bank	7.25%	7.75%
RBL Bank	7.10%	7.60%
Federal Bank	7.10%	7.60%
HDFC Bank	7.00%	7.50%
ICICI Bank	7.00%	7.50%
Axis Bank	7.00%	7.75%
Bandhan Bank	7.00%	7.50%
Bank of Baroda	6.80%	7.40%
IDFC FIRST Bank	6.75%	7.25%
State Bank of India	6.50%	7.50%

How tax-saving FDs work

Tax-saving FDs have a minimum lock-in period of five years, although some banks offer tenures of up to 10 years. During the five-year lock-in, investors cannot prematurely withdraw the deposit or avail of a loan against it.

The investment qualifies for deduction under Section 80C, but the annual interest earned is fully taxable. Banks also deduct Tax Deducted at Source (TDS) if the interest income exceeds the prescribed threshold during a financial year.

Investors can open these deposits individually or jointly. However, in a joint account, only the first holder is eligible to claim the tax deduction.

Who can invest?

Resident individuals and Hindu Undivided Families (HUFs) are eligible to invest in tax-saving FDs. Most banks allow investments starting from a few hundred rupees, while the deduction under Section 80C is capped at ₹1.5 lakh in a financial year.

Applicants need standard KYC documents, including PAN, Aadhaar or another government-issued identity proof, address proof and photographs. Senior citizens must also provide age proof to avail of the higher interest rate.

Things investors should remember

While tax-saving FDs provide capital protection and assured returns, experts advise investors to consider the post-tax return before investing, as interest is added to taxable income.

Those whose total taxable income falls below the exemption limit can avoid TDS by submitting Form 15G, while eligible senior citizens can submit Form 15H. Investors should also ensure their PAN is linked to the FD account, as failure to provide PAN may result in TDS being deducted at a higher rate.

For investors seeking certainty and low risk, tax-saving FDs remain a suitable option. However, those with a longer investment horizon and a higher risk appetite may compare them with alternatives such as ELSS funds before making a decision.