Most of the fixed deposits offer a secured return and a higher interest rate compared to other traditional investment instruments. The fixed deposit schemes come with various tenures and sizes to meet the needs of a wide range of investors. Apart from regular FDs of shorter durations, there are a few FDs which also offer tax benefits. Generally, the tax-saving FDs come with a tenure of at least five years.

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Many tax saving FDs are eligible for tax deductions under Section 80C of the Income Tax Act, 1961.  If you want to diversify your portfolio with tax saving instruments then FDs could also be a suitable option.

Before choosing a fixed deposit scheme for tax benefits it’s important to evaluate a few factors like features, maturity benefits, deposit term and interest rate among others.

What is a Tax-saving Fixed Deposit?

Fixed Deposits (FDs) are short-term or long-term investment options provided by a bank or NBFC, wherein you earn interest at a fixed rate. While premature withdrawal of funds isn't allowed, one can do so by paying a penalty. On the other hand, tax-saving FDs enable you to save up to Rs 1.5 lakh under Section 80C of the I-T Act. It's different from the short-term FDs and has a lock in period of five years. These fixed deposits provide tax benefits as well as guaranteed returns in the form of pre-determined interest rates.

Key features of tax-saving FDs

  • It allows investors to avail tax deductions up to Rs 1.5 lakh per annum under Section 80C.
  • The investment has to be made for at least five years.
  • The interest earned is taxable and is deducted at source.
  • Premature withdrawals or overdraft (OD) facilities aren't available.
  • No auto-renewal feature.
  • Interest rates remain fixed for the entire tenure.

Are tax-saving FDs better than other 80C investments?

Tax-saving FDs can prove to be better than the two popular 80C investments, namely, Public Provident Funds (PPF) and Equity-linked Savings Scheme (ELSS) mutual funds. Tax Saving Fixed Deposits come with a lock-in period of five years, which is way lesser than PPF's lock-in period of 15 years. However, an ELSS mutual fund comes with a lock in period of three years.

While ELSS mutual funds have a shorter lock-in period, the risk involved is much higher as these funds work by investing your funds in the stock market. Conversely, tax-saving FDs come with fixed returns and are much safer.