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TaxBuddy’s Guide to Tax-Saving Fixed Deposits

  • Writer: Bhavika Rajput
    Bhavika Rajput
  • 12 minutes ago
  • 9 min read

Tax-saving fixed deposits (FDs) provide Indian investors a safe and tax-efficient way to save while claiming deductions underSection 80C of the Income Tax Act, 1961. With a lock-in period of five years, these FDs ensure disciplined investing and allow a maximum deduction of Rs 1.5 lakh per financial year. Although the principal is deductible, interest earned is fully taxable based on the investor’s income slab. The 2025 updates have increased TDS exemption limits and introduced senior citizen benefits, making it essential for investors to plan FD investments strategically. TaxBuddy simplifies this process with digital tools, calculators, and reminders for efficient tax-saving FD management.

Table of Contents

What are Tax-Saving Fixed Deposits?

Tax-saving fixed deposits are financial instruments offered by banks and certain financial institutions, specifically designed to provide tax benefits under Section 80C. Unlike regular FDs, these deposits have a mandatory lock-in period of five years, during which premature withdrawal is not allowed. The principal amount invested qualifies for deduction, reducing the taxable income of the investor. The interest earned, however, is taxable, making it essential to plan investments carefully. Tax-saving FDs are ideal for individuals seeking a secure investment option that also contributes to reducing their income tax liability.


How Tax Deduction Works Under Section 80C

Under Section 80C of the Income Tax Act, investments in tax-saving fixed deposits allow a deduction of up to ₹1.5 lakh per financial year from the taxable income. This deduction reduces the overall tax liability of the investor in the respective financial year. The principal invested in the FD is eligible for deduction, but the interest earned is taxable as per the investor’s applicable income tax slab. By including tax-saving FDs in a broader portfolio of eligible Section 80C investments—like PPF, ELSS, and life insurance—investors can strategically lower their tax burden while maintaining safe returns.


Interest Taxation and TDS on Fixed Deposits in 2025

Interest earned on fixed deposits (FDs), including tax-saving FDs, is considered part of the investor’s total income and is taxed according to the individual’s applicable income tax slab. For instance, if an investor falls under the 20% tax bracket, the interest income from FDs will be added to their total income and taxed at 20%, after accounting for deductions, exemptions, or rebates available under the Income Tax Act. This ensures that even income from safe investments like FDs is subject to taxation, maintaining parity with other sources of income.


Banks are mandated to deduct Tax Deducted at Source (TDS) on FD interest once the cumulative interest earned across all deposits in a particular bank exceeds ₹50,000 in a financial year for regular taxpayers. For senior citizens, this threshold is ₹40,000. The TDS rate is fixed at 10%, and the bank issues a TDS certificate (Form 16A) to the account holder, reflecting the amount deducted.


It is important to note that TDS is applicable even on tax-saving FDs under Section 80C. Therefore, investors must include all FD interest income in their Income Tax Return (ITR), irrespective of TDS deductions. If the total TDS deducted during the year exceeds the actual tax liability, the excess amount can be claimed as a refund while filing the ITR. Accurate reporting ensures the refund is processed smoothly and helps avoid any notices from the Income Tax Department regarding underreporting of income.


Additionally, proper reporting of FD interest in the ITR allows taxpayers to utilize deductions like Section 80TTA(for savings account interest) where applicable, and to reconcile TDS records reflected in Form 26AS with actual income, minimizing discrepancies and potential delays in refunds.


Is Tax on FD Interest Allowed in the New Tax Regime?

Yes, interest earned from tax-saving FDs remains taxable under the new tax regime. While the new tax regime offers lower slab rates, it does not provide exemptions for Section 80C deductions. Therefore, even if an investor opts for the new regime, the principal invested in a tax-saving FD will not yield a deduction, though the interest earned will still be taxed as per the slab applicable to total income. Investors must carefully assess whether the old or new tax regime offers better overall tax efficiency when including FDs in their portfolio.


How to Minimise Tax on FD Interest

Fixed Deposits (FDs) are a popular investment option due to their safety and guaranteed returns, but the interest earned on FDs is fully taxable as per the investor’s applicable income tax slab. To minimise the tax impact, investors can take several strategic steps. One of the simplest methods is to split investments across multiple banks. By keeping the principal amounts in each bank below the TDS (Tax Deducted at Source) threshold of ₹40,000 per year (₹50,000 for senior citizens), investors can avoid automatic TDS deductions while still earning returns.


For individuals whose total taxable income is below the basic exemption limit, submitting Form 15G (or Form 15H for senior citizens) to the banks ensures that TDS is not deducted on FD interest. This is particularly useful for retirees or individuals with multiple FDs, as it prevents unnecessary deductions and cash flow issues.


Additionally, considering tax-efficient alternatives alongside FDs can help reduce the overall tax burden. Investments in instruments such as Public Provident Fund (PPF), National Pension Scheme (NPS), or Equity Linked Savings Schemes (ELSS) allow taxpayers to claim deductions under Section 80C, which lowers taxable income and offsets tax liability on FD interest.


Regular monitoring of interest income across all deposits is also crucial. Maintaining a consolidated record of all FD interest ensures proper planning of TDS payments and advance tax if required. Tax filing platforms like TaxBuddy can simplify this process by aggregating interest data, helping taxpayers report income accurately, and offering guidance on optimising tax liability.


By combining careful planning, submission of the correct forms, and the use of tax-efficient alternatives, FD investors can effectively minimise their tax outgo while continuing to benefit from safe, predictable returns.


Bank Account Opening Process for Tax-Saving FDs

Opening a bank account for tax-saving fixed deposits (FDs) involves a few straightforward steps, but it is essential to understand the process fully to ensure compliance and smooth management of your investment. The first requirement is completing the Know Your Customer (KYC) formalities. KYC involves submitting valid identity proof, address proof, and PAN details to the bank. This step is mandatory for all investors and ensures that the account is linked to the correct individual for both investment and tax purposes.


Investors have the flexibility to open a tax-saving FD account either online through the bank’s official portal or physically by visiting a branch. Online applications typically involve filling in personal details, uploading scanned copies of KYC documents, and selecting the investment amount and tenure. In-branch applications require submitting physical copies of documents and filling out the bank’s application forms.


Once KYC is completed and approved, the principal amount is deposited into the FD account, and the FD is created with a mandatory five-year lock-in period. This lock-in period is crucial, as premature withdrawal is not allowed under Section 80C rules for tax-saving purposes. After the FD is created, the bank issues an FD certificate, which serves as proof for claiming deductions during ITR filing. Many banks also provide the convenience of online banking, allowing investors to track interest accrual, manage renewals at maturity, and ensure timely compliance with tax-related documentation.


Benefits of Using TaxBuddy for Tax-Saving FDs

Using TaxBuddy for managing tax-saving fixed deposits (FDs) offers a streamlined and comprehensive approach to tax planning and filing, especially for individuals looking to maximise their Section 80C benefits. One of the key advantages of TaxBuddy is its ability to consolidate interest income from multiple banks, which ensures that all income is accurately reported in the Income Tax Return (ITR). This feature significantly reduces the risk of errors or mismatches between TDS (Tax Deducted at Source) recorded by banks and the income declared in the return, which can otherwise lead to notices from the Income Tax Department.


TaxBuddy also simplifies the calculation of the correct tax liability on interest earned from tax-saving FDs, taking into account the exemptions available and the applicable slab rates under the old and new tax regimes. This allows users to make informed decisions on whether the old or new tax regime is more beneficial for their overall tax planning.


Moreover, the platform provides timely reminders for filing returns, tracking TDS deductions, and claiming any refunds. It also offers expert guidance, helping users optimise their Section 80C contributions and other related deductions. By integrating these features into a single platform, TaxBuddy ensures that both salaried individuals and professionals can manage their tax-saving FDs efficiently, avoid mistakes, and enjoy a hassle-free and accurate tax filing experience.


Conclusion

Tax-saving fixed deposits provide a secure avenue for capital growth while offering tax benefits under Section 80C. Understanding interest taxation, TDS implications, and proper reporting is essential to maximise returns and avoid penalties. Platforms like TaxBuddy help streamline this process, ensuring accurate filing, optimised tax savings, and efficient management of FD-related income. For anyone looking to manage tax-saving FDs effectively, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.


FAQs

Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?

TaxBuddy provides both self-filing and expert-assisted options. Self-filing allows taxpayers to complete their ITR independently using the platform’s intuitive interface, automated calculations, and guidance prompts. Expert-assisted plans connect users with certified professionals who review the ITR, ensure accuracy, optimize deductions, and handle any complex scenarios, providing peace of mind and reducing errors.


Q2. Which is the best site to file ITR?

TaxBuddy is widely considered one of the best platforms for filing ITR due to its user-friendly interface, AI-driven tools, and secure environment. It offers both self-filing and expert-assisted plans, supports multiple ITR forms, provides real-time error checks, and ensures compliance with the latest Income Tax regulations.


Q3. Where to file an income tax return?

Income tax returns can be filed on the official Income Tax e-filing portal or through authorised online platforms like TaxBuddy. TaxBuddy simplifies the process with AI-driven guidance, auto-matching ofForm 16 and Form 26AS, and seamless e-verification options.


Q4. Can interest on tax-saving FDs be claimed under the old and new tax regimes?

Under the old tax regime, interest earned on tax-saving FDs qualifies for deduction under Section 80C up to ₹1.5 lakh. In the new tax regime, most deductions, including interest on tax-saving FDs, are not allowed, meaning taxpayers cannot claim it against their taxable income.


Q5. What is the minimum lock-in period for a tax-saving FD?

Tax-saving FDs have a mandatory lock-in period of five years, during which premature withdrawals are not allowed. This period ensures compliance with Section 80C provisions and eligibility for tax benefits.


Q6. How is TDS on FDs calculated?

TDS (Tax Deducted at Source) on fixed deposits is calculated at 10% if the interest exceeds ₹50,000 for non-senior citizens and ₹75,000 for senior citizens in a financial year. The deduction is applied automatically by the bank before interest is credited to the account. Taxpayers can adjust TDS while filing their ITR if their total tax liability differs.


Q7. Can senior citizens avoid TDS using Form 15H?

Yes, senior citizens who meet certain conditions, such as having no tax liability for the year, can submit Form 15H to the bank. This prevents TDS deduction on their interest income and ensures smoother cash flow without upfront tax deductions.


Q8. Are premature withdrawals allowed on tax-saving FDs?

No, premature withdrawals are not allowed on tax-saving FDs. The five-year lock-in period must be completed to retain tax benefits. Any withdrawal before this period results in loss of tax deductions under Section 80C.


Q9. How can one track interest earned across multiple FDs?

Taxpayers can track interest from multiple FDs by maintaining a detailed record of deposit amounts, interest rates, and maturity dates. Many banks also provide consolidated interest certificates. Platforms like TaxBuddy allow users to upload interest statements and automatically calculate total income from FDs for accurate reporting in ITR.


Q10. Does TaxBuddy provide alerts for FD-related tax filing deadlines?

Yes, TaxBuddy offers automated reminders and notifications for tax filing deadlines related to interest income, including FDs. These alerts help taxpayers avoid penalties, ensure timely filing, and stay compliant with income tax regulations.


Q11. Can tax-saving FDs be used to optimize Section 80C benefits?

Yes, investments in tax-saving FDs are eligible under Section 80C up to a maximum limit of ₹1.5 lakh per financial year. They are a safe and reliable option to reduce taxable income while earning interest, making them suitable for conservative investors seeking tax benefits.


Q12. How can excess TDS deducted be claimed as a refund?

Excess TDS deducted on FDs or other income can be claimed as a refund while filing ITR. Taxpayers need to report the total TDS shown in Form 26AS, calculate the actual tax liability, and claim the excess amount as a refund. TaxBuddy simplifies this process by automatically reconciling TDS and guiding taxpayers to claim refunds efficiently.


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