Tax-saving FDs offer up to 8.10% interest: Check highest rates, tax benefits, lock-in rules

Tax-saving fixed deposits (FDs) continue to be a popular choice among conservative investors looking to save income tax while earning guaranteed returns. Eligible under Section 80C of the Income Tax Act, 1961, these deposits allow taxpayers to claim deductions of up to ₹1.5 lakh in a financial year, while offering fixed returns that are insulated from market volatility.

However, unlike regular fixed deposits, tax-saving FDs come with a mandatory five-year lock-in period, during which investors cannot withdraw their money prematurely or avail loans or overdraft facilities against the deposit. While the principal qualifies for tax deduction, the interest earned is taxable and subject to tax deducted at source (TDS), wherever applicable.

Financial planners say tax-saving FDs are best suited for risk-averse investors who want assured returns while exhausting their Section 80C limit.

How tax-saving FDs work

Investors make a one-time lump-sum investment for a fixed tenure of five years. The interest rate remains locked throughout the tenure, irrespective of future changes in bank deposit rates.

Unlike equity-linked tax-saving products such as ELSS, tax-saving FDs are not linked to market performance, making returns predictable. Investors can choose periodic interest payouts—monthly or quarterly—or opt for cumulative deposits where interest is reinvested until maturity.

Tax-saving FDs can be opened individually or jointly. However, in the case of joint accounts, only the first account holder is eligible to claim the tax deduction.

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Small finance banks offer the highest returns

Among banks, Suryoday Small Finance Bank currently offers the highest interest rate of 7.90% for general citizens and 8.10% for senior citizens on tax-saving FDs. It is followed by Jana Small Finance Bank, which offers 7.77% to general depositors and 8.00% to senior citizens.

Other banks offering attractive rates include DCB Bank (7.50%), Ujjivan Small Finance Bank (7.20%), and SBM Bank India and Utkarsh Small Finance Bank, both offering 7.00% to general customers.

Among large private sector lenders, ICICI Bank offers 6.50%, HDFC Bank 6.40%, Axis Bank 6.45%, while State Bank of India offers 6.05% for general citizens and 7.05% for senior citizens.

Taxation angle

Tax-saving fixed deposits offer a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, making them a popular tax-saving instrument for conservative investors. These deposits come with a mandatory five-year lock-in period, during which premature withdrawals are not permitted.

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Unlike regular fixed deposits, investors cannot avail of loan or overdraft facilities against tax-saving FDs. While the interest rate remains fixed throughout the tenure, ensuring predictable returns, the interest earned is taxable according to the investor's income tax slab. Tax-saving FDs can be opened in single or joint names, although the tax benefit is available only to the first account holder. They are generally best suited for investors seeking capital protection, guaranteed returns and tax savings rather than market-linked growth.

Tax-saving FD vs ELSS vs PPF

Tax-saving FDs are one of several investment options available under Section 80C.

Compared with Equity Linked Savings Schemes (ELSS), tax-saving FDs offer capital protection but generally lower long-term return potential, as ELSS investments are linked to equity markets. ELSS also has a shorter three-year lock-in period, though returns are market-dependent.

The Public Provident Fund (PPF) offers government-backed safety and tax-efficient returns but requires a 15-year lock-in period, making it less suitable for investors seeking medium-term liquidity.

Experts say the choice depends on an investor's risk appetite, investment horizon and financial goals. Those seeking guaranteed returns may prefer tax-saving FDs, while investors with a longer horizon and higher risk tolerance may consider ELSS for potentially higher wealth creation.

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