5 Best Tax-Saver Bank Fixed Deposits You Should Consider in 2025

The interest rate upcycle was largely influenced by the series of repo rate hikes by the Reserve Bank of India (RBI) between May 2022 and February 2023, resulting in a cumulative increase of 250 basis points.

Following this, the RBI maintained the policy repo rate at 6.50% until December 2024. As a result, many banks in India increased the interest rates on term deposits to attract investors.

However, in its February 2025 bi-monthly monetary policy meeting, the RBI decided to lower the repo rate by 25 basis points (bps) to 6.25%.

One of the primary reasons behind this decision was the easing of inflation.

India's Consumer Price Index (CPI) inflation, also known as retail inflation, came down to 4.31% by January 2025 from its peak of 6.21% in October 2024 (which crossed RBI's tolerance threshold of 4-6%). The decline is largely attributed to a fall in the 'food and beverage inflation', which has a weight of nearly 46% in the headline inflation.

Should inflation continue to ease and remain within the RBI's target range of 4-6%, the central bank may consider another repo rate cut of 25 bps in the April 2025 bi-monthly monetary policy. If a further rate cut indeed transpires, banks are likely to respond by lowering FD interest rates, impacting returns for depositors.

This makes the present moment an opportune time for senior citizens/retirees and other risk-averse investors to invest money in tax-saver bank FDs (and other traditional interest-bearing investment avenues).

Let's understand more about Tax-Saving Fixed Deposits.

What Are Tax-Saving Fixed Deposits?

A Tax-Saver Fixed Deposit or Tax-Saving Fixed Deposit is a type of FD account that offers tax benefits under Section 80C of the Income Tax Act. Investors can claim a tax deduction of up to Rs 1.5 lakh per financial year by locking in money through a Tax-Saver FD.

[Read: Are You a Risk-Averse Investor? Here Are Your Best Tax-Saving Investment Options for FY25]

Resident individuals and Hindu Undivided Families (HUFs) are eligible to invest in Tax-Saver FDs. However, entities such as partnership firms, corporates, and trusts cannot avail of this scheme.

Deposits can be held individually or jointly (including minors who can invest jointly with an adult). However, the Section 80C deduction can only be claimed by the first holder (a PAN card holder).

Key Features of Tax-Saving Fixed Deposits

1. Lock-in Period

Tax-Saver FDs come with a mandatory lock-in period of five years. Unlike regular fixed deposits, they do not allow premature withdrawal, Loan Against Fixed Deposit, or overdraft facilities.

Therefore, if you anticipate needing access to your funds in the near future, a Tax-Saver FD might not be a suitable option. Additionally, these deposits do not offer an auto-renewal option. However, at the time of maturity, you have the option to renew the FD for another five years.

2. Interest Rate Payouts

You have the flexibility to choose how you receive interest - either as monthly or quarterly payouts directly credited to your registered bank account or by reinvesting it into the principal amount.

3. Minimum and Maximum Investment Amount

The minimum investment amount is as low as Rs 100 and multiples thereof, while the maximum limit is set at Rs 1.5 lakh per financial year.

4. Transfer

If you relocate, you can transfer your Tax-Saver FD to the nearest bank branch or post office to continue benefitting from smooth customer service.

Rate of Interest for Tax-Saving Fixed Deposits

Interest rates on Tax-Saving FDs vary from bank to bank. Also, senior citizens typically receive an additional interest rate upto 0.50% as compared to non-senior citizens (individuals below 60 years of age).

[Read: Why Senior Citizens Should Consider Investing in Bank FDs Now]

Here's a look at 5 banks offering attractive interest rates...

While high interest rates certainly seem appealing, exercise caution when considering banks offering interest rates significantly above the market average, as higher returns often come with increased risk.

It is prudent to diversify your FD investments across banks to spread your risk while taking advantage of competitive interest rates from certain financial institutions.

Who Should Consider Tax-Saving Fixed Deposits?

As with any other financial instrument, it is essential to evaluate your age, financial goals, risk appetite, investment horizon, and current and future estimated income, before investing.

Tax-saver FDs could be ideal for you if:

• You are a risk-averse investor or have a low-risk appetite.

• You are a senior citizen or are nearing retirement.

• You are a salaried individual/professional following the Old Tax Regime and wish to optimise your tax savings.

• You are new to investing and looking for a relatively safer, tax-efficient investment option.

How to Invest in Tax-Saving Fixed Deposits?

If you are an existing customer of a bank, you can conveniently open an FD online through internet banking or a mobile app.

Alternatively, you can visit your preferred bank branch or post office and submit a duly filled and signed Tax-Saver FD application form along with self-attested copies of the required documents.

If you already have an active savings account or fixed deposit with the bank, you may not need to provide any additional documentation.

However, if you are a new customer with no prior banking relationship or if your existing account is inactive or frozen, you will be required to provide identity proof, address proof, a recent photograph, and any other documents requested by the bank or post office.

Tax Implications of Investing in Tax-Saving Fixed Deposits

Interest earned on bank FDs is taxable under the head "Income from Other Sources" and is taxed according to your applicable income tax slab.

Banks deduct TDS at 10% in cases where the total interest earned exceeds Rs 40,000 (Rs 50,000 for senior citizens) in a financial year. However, if you have not provided your PAN, the TDS deduction increases to 20%.

The TDS can be avoided if you submit Form 15G (for non-senior citizens) or Form 15H (for senior citizens) at the beginning of the financial year to the respective bank/s.

Additionally, senior citizens can avail a deduction of up to Rs 50,000 on interest income under Section 80TTB of the Income Tax Act.

To Conclude...

If you follow a thoughtful approach and invest in Tax-Saving FDs now before the interest rates potentially decline, you can be well-positioned to earn respectable returns while optimising your tax-savings.

Happy investing!

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.