In case you still haven’t made any tax-saving investments and are wondering what could be the right step in that direction, then a tax-saving fixed deposit (FD) could be a viable option. Anybody who wants guaranteed returns at low-risk for a medium-term investment range and higher tax benefits can consider investing in a tax-saving fixed deposit.

Some of the salient features of a tax-saving FD are:

  • Investments in a tax-saving fixed deposit are eligible for deduction under Section 80C of the Income Tax Act, 1961. 
  • They have a lock-in period of 5 years
  • Interest earned is taxable as per investor’s tax bracket
  • One needs to invest a minimum amount (can be ₹1,000/5,000; varies with the bank)
  • Rate of interest earned currently across all categories of investors ranges from 6.5% to 8.5%. Senior Citizens typically get higher interest rates
  • Tax-saving FDs are a safe investment with no exposure to equity markets. There is no volatility involved in the rate of return, while the principal amount always remains secure. 
Benefits of Investing in Tax-Saving FDs

  • Such fixed deposits have a higher interest-earning potential compared to a regular savings account.
  • FD allows a one-time deposit of a lump sum amount.
  • Since it’s an investment product that’s purely bank-based and closely monitored by the RBI, it is safe and low-risk in nature.
  • FDs offer flexibility in the tenure and amount to investors, unlike other tax-saving investment options.
  • Easier to get a loan on the specific FD amount for a lesser interest

All banks offer the facility to create a fixed deposit that will help save tax. However, it’s the interest rate that will vary from bank-to-bank. So, investors need to compare the interest rates offered by different banks and decide to go ahead after taking into consideration factors like the safety of the money that will be deposited, returns on the investment to be made and other related services provided by the bank. A tax-saving FD can also be transferred from one bank branch to another. While the safety of fixed deposits makes them attractive, investors also need to consider if returns are beating inflation in the long-term. While an investor may allocate a portion of their portfolio to fixed deposits, they also need to ensure that they diversify their portfolio to get returns that can beat inflation in the long-term. From that angle, it is also essential to consider market-linked instruments that also offer tax benefits. ULIPs, for instance, are instruments that come with 80C deduction but also offer market-linked returns.