Tax-saving FDs explained: Lock-in period, tax benefits and banks offering highest interest rates

Fixed deposits have long been a go-to investment choice for Indians because of their safety and predictable returns. With 5-year tax-saving FDs offering deductions of up to ₹1.5 lakh under Section 80C and some banks currently providing interest rates as high as 7.90%, it continues to be an attractive avenue for those prioritising capital protection over higher-risk instruments like equities and mutual funds.

What are tax-saving Fixed Deposit (FD)?

These are bank-backed savings instruments that offers individuals to earn interest and at the same time receive tax benefit. It is an extremely safe and secure way to build wealth and reduce taxable income.

What is the lock-in period?

The tax-saving FDs come with a 5-year lock-in period, i.e. the invested principal cannot be withdrawn before maturity.

What are the tax benefits for for tax-saving FDs?

Investments in tax-saving fixed deposits qualify for deductions of up to ₹1.5 lakh in a financial year under Section 80C of the Income Tax Act.

However, it needs to be noted that only the principal amount that has been invested in a tax-saving FD qualifies for deduction under Section 80C. But, the interest you earn from them it taxable.

What is the interest rate for tax-saving FDs?

The interest rates for tax-saving FDs ussualy range from 5.5 - 7.75% p.a. Here's a look at the best rates the banks are offering for 5-year tax saving.

Private Banks: Among major private sector lenders, DCB Bank currently offers the highest 5-year FD interest rate for general citizens at 7.25%. IDFC FIRST Bank follows with a 7.15% rate, while YES BANK, RBL Bank and Tamilnad Mercantile Bank are offering between 6.70% and 6.75% for similar tenures.

PSU Banks: Among PSU banks, Bank of Baroda is offering the highest 5-year FD rate at 6.30%. Meanwhile, Canara Bank and State Bank of India (SBI) are offering 6.25% and 6.05% interest rates, respectively, on their 5-year FDs.

Small Finance Banks: Suryoday Small Finance Bank offers the highest 5-year FD interest rate at 7.90% among all the SFBs. Followed by Jana Small Finance Bank at 7.77% and Ujjivan Small Finance Bank at 7.20%.

Tax-saving FDs: Key features to consider

• The tax-saving FDs come with a 5-year lock-in period
• They qualify for deduction under Section 80C
• Interest rate around 5.5 - 7.75% p.a
• Tax-saving FDs offer lower risk than other Section 80C options like PPF or ELSS, but come with limited liquidity due to the mandatory 5-year lock-in.

Who can invest in tax-saving FD?

These fixed deposits are ideal for risk-averse investors, especially those nearing retirement or already retired - who are looking for stable and assured returns on their savings.

However, any individual - Indian resident, senior citizens, Hindu Undivided Families (HUFs), and NRIs - can invest in tax saving FDs