Tax-free fixed deposit schemes: Best ways to save on taxes

Fixed deposits are among the most trusted investment options for Indian savers due to their guaranteed returns and capital safety. Whether you are a working professional, a retired individual, or a homemaker, fixed deposits offer financial stability with flexible tenures. However, the interest earned on fixed deposits is generally taxable, which can impact your overall returns. Fortunately, there are tax-saving fixed deposit options available that help you reduce your tax liability while still enjoying steady earnings.

In this blog, we’ll explore the best ways to save on taxes through fixed deposit schemes, the types of fixed deposit accounts available in India, and how to make smarter investment decisions that align with your financial goals and tax-saving needs.

What is a tax-saving fixed deposit?

A tax saving fixed deposit is a special type of deposit offered by banks and select financial institutions that provides a deduction of up to Rs.1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961. These deposits come with a lock-in period of 5 years and are suitable for individuals looking to reduce their taxable income legally while earning assured interest.

Bajaj Finance may not provide tax saving FD options but you can get high interest rates of up to 8.60% p.a. Check out Bajaj Finance FD’s today!

Key features of tax-saving fixed deposits:

1. Only individuals and Hindu Undivided Families (HUFs) are eligible.
   
   

2. Maximum deduction: Rs.1.5 lakh per financial year under Section 80C.
   
   

3. Fixed 5-year lock-in period; premature withdrawal is not allowed.
   
   

4. Interest earned is taxable based on your income tax slab.
   
   

5. No loan facility is available against the deposit during the lock-in period.
   
   

Types of fixed deposit accounts and their tax implications

There are various types of fixed deposit schemes available in India, each with different features and tax treatment. Understanding the options can help you select the right one for your financial and tax-saving goals.

1. Regular fixed deposits

These are standard term deposits offered by banks and NBFCs, where you invest a lump sum amount for a fixed tenure at a predetermined interest rate.

●       Interest is taxable as per your income slab.

●       TDS (Tax Deducted at Source) is applicable if annual interest exceeds Rs. 50,000 (Rs. 1,00,000 for senior citizens).

●       No tax benefit under Section 80C.

2. Tax-saving fixed deposits

These are eligible for a deduction under Section 80C.

●       Tenure: Fixed at 5 years.

●       Interest is taxable but investment amount is tax-deductible.

●       No premature withdrawal or loan facility.

3. Cumulative fixed deposits

Interest is compounded periodically and paid at maturity.

●       Suitable for those who do not require regular income.

●       Entire interest is taxable in the year of maturity.

●       No tax deduction under Section 80C unless it is a tax-saving FD.

4. Non-cumulative fixed deposits

Interest is paid monthly, quarterly, half-yearly, or annually.

●       Ideal for those seeking regular income.

●       Interest is taxable in the year it is received.

●       Tax-saving benefit available only if it falls under tax-saving fixed deposits.

Best practices to save taxes using fixed deposits

Fixed deposits can be used effectively to lower your taxable income when combined with other tax-saving investments. Here’s how you can make the most of it:

1. Invest in 5-year tax-saving fixed deposits

Choose tax-saving fixed deposits from a scheduled bank to claim deductions under Section 80C.

●       Plan the investment at the start of the financial year for maximum benefit.

●       Invest up to Rs.1.5 lakh per financial year.

●       Combine with other Section 80C investments like PPF, ELSS, or life insurance to meet the limit.

2. Use senior citizen schemes for higher exemption limits

If you are a senior citizen, you get a higher TDS exemption limit (Rs.50,000 per annum) on interest earned.

●       Submit Form 15H to avoid TDS if your total income is below the taxable limit.

●       Consider investing in senior citizen-specific FD schemes offered by banks for higher interest.

3. Club FDs with other tax-saving tools

Fixed deposits are just one part of your tax-saving strategy. Pair them with:

●       PPF (Public Provident Fund)

●       ELSS (Equity Linked Saving Schemes)

●       Sukanya Samriddhi Yojana

●       National Savings Certificate

This ensures that you diversify your tax-saving investments and maximise Section 80C deductions.

4. Distribute FDs to family members

If your taxable income is high, consider investing in fixed deposits under the names of family members who fall in lower or nil tax brackets.

●       Gift money to your spouse or parents and invest in their name.

●       Ensure the recipient is not earning beyond the taxable limit to minimise overall family tax liability.

Important tips before investing in tax-saving fixed deposits

1. Check the credibility of the bank or financial institution
    Choose deposits from reputed banks or NBFCs with high credit ratings.
   
   

2. Compare interest rates
    Tax-saving FDs from private banks often offer better rates than public sector banks.
   
   

3. Plan your cash flow
    As tax-saving FDs have a lock-in period of 5 years, ensure you do not need this amount for emergencies.
   
   

4. Use online FD calculators
    Estimate your returns and maturity amount using FD calculators available on bank websites.
   
   

Alternatives to tax-saving fixed deposits

If your goal is both wealth creation and tax savings, consider comparing FDs with other tax-saving instruments:

●       ELSS mutual funds offer tax-saving with potential for higher returns but come with market risk.

●       PPF is government-backed, tax-free, and offers long-term savings with fixed returns.

●       National Pension System (NPS) offers additional tax benefits under Section 80CCD(1B) up to Rs.50,000.

Each of these has different risk, return, and lock-in characteristics.

Conclusion

Fixed deposits are an excellent investment choice for conservative savers, and when used strategically, they can also help reduce your tax burden. Among the types of fixed deposit options available, the 5-year tax-saving FD stands out for its dual benefit of safety and tax deduction under Section 80C.

By planning your investments early in the financial year and integrating them with other tax-saving tools, you can ensure not only better financial discipline but also smarter tax management.

Whether you’re a first-time investor or someone nearing retirement, tax-saving fixed deposits are a simple and effective way to grow your money while keeping your tax liability in check.

Bajaj Finance may not offer tax-saving FD options, but you can get high interest rates of up to 8.60% p.a. with Bajaj Finance FDs! Check it out today. You can also check your potential returns with the Bajaj Finance FD Calculator.

Disclaimer: This article is published in association with Baja Finserv and not created by TNM Editorial.