The principal amount you invest is not taxable. However, the interest earned on the FD is taxable under the head "Income from Other Sources" and taxed as per the applicable tax rules. There are no benefits of investing in a regular FD. You can break your FD before maturity if needed, subject to premature withdrawal rules.

A Tax-Saver FD is a type of bank FD where the amount you invest (principal) can qualify for a tax deduction up to ₹1.5 lakh (in a financial year) under Section 123 of the Income-tax Act, 2025 (earlier Section 80C). The interest earned is still taxable under "Income from Other Sources" as per the applicable tax rules.

Tax-Saver FD comes with a mandatory 5-year lock-in period. You cannot choose a shorter tenure. Also, you cannot close or withdraw money from a tax-saving FD before maturity.

Tax Saver FD vs Regular FD

You can go through the table below to compare the key features of both types of FDs.

How Much Tax Can You Save With a Tax-Saver FD?

You can claim tax deduction of up to ₹1.5 lakh in a financial year. Please note that this benefit is only available under the old tax regime.

Is Interest Earned on Tax-Saver FD Tax-Free?

No. The interest earned on a Tax-Saver FD is not tax-free. It is added to your total income under the head "Income from Other Sources" and taxed according to your applicable tax slab.

Do Tax-Saver FDs Offer Higher Interest Rates?

A Tax-Saver FD is generally chosen for its tax benefit rather than a higher interest rate. The interest rate on a Tax-Saver FD depends on the bank.

Since a Tax-Saver FD comes with a five-year lock-in, keeping the interest invested instead of taking periodic payouts can allow the interest to compound. Over time, compounding can help increase the overall maturity amount.

Can You Open a Tax-Saver FD If You Choose the New Tax Regime?

Yes, you can open a Tax-Saver FD even if you choose the new tax regime. The choice of tax regime does not affect who can open a Tax-Saver FD. The difference is that you cannot claim the tax deduction benefit under the new tax regime. However, the five-year lock-in still applies.

If you are not looking for tax benefits, you can consider other FD options that suit your investment needs and return expectations.

1. Digital FDs, which you can open and manage entirely online without visiting a branch.
2. Senior citizen FDs, which may offer a higher interest rate to eligible investors aged 60 and above.
3. FD tenures with higher interest rates, not all FD tenures offer the same interest rate, and not necessarily the longest tenure always offer the highest FD interest rate.
4. Special FD variants, such as Ujjivan SFB's Platina FD, which may offer a higher interest rate than regular FDs, subject to the applicable terms and deposit amount.

Use an FD calculator to know how much you will earn through different tenures, interest rates and investment amounts. It will help you pick the FD with higher returns.

Final Thoughts

Please note that the primary difference between a tax-saver FD and a regular FD is that a tax-saver fixed deposit offers tax deduction (under old tax regime) while there's no such facility for regular FD. Also, there's a mandatory lock-in period of 5 years for tax saver FD, meaning you cannot withdraw or close your FD before maturity. For regular and callable FDs, you can withdraw or close your FD before maturity, subject to terms and conditions.

Disclaimer:

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