Tax Saver FD vs Regular FD – What’s the Difference?

Posted on Wednesday, February 5th, 2025 | By IndusInd Bank

A fixed deposit (FD) investment can yield various benefits, of which assured returns, safety of the principal amount, and flexibility are only a few. But, did you know that by choosing a specific type of FD, called the tax-saver FD, you can save tax and enjoy the benefits of fixed deposits?

These FDs provide tax deductions under Section 80C of the Income Tax Act of 1961. However, apart from the tax benefits, there are some features of tax-saver FDs that make them different from regular FDs.

Let’s explore these differences to understand which is a better option for you. 

What is a Tax-Saver Deposit?

A tax-saver fixed deposit is an FD product that offers tax benefits under Section 80C of the Income Tax Act, 1961. This contrasts with a regular fixed deposit, which does not offer tax benefits. 

By investing in a tax saver FD, you can claim a tax deduction of up to ₹1.5 lakh per annum. These FDs follow the ETE (Exempt-Taxed-Exempt) principle. Hence:

• The initial investment is exempt from tax.
• The annual interest earned is taxable and added to your gross income.
• Upon maturity, the final amount (principal + interest) is exempt from additional tax.

Tax Deducted at Source (TDS) applies to the fixed deposit interest if it exceeds the threshold limit of ₹40,000 (₹50,000 for senior citizens) annually.

How Does a Tax-Saver FD Differ from a Regular FD?

Here are a few factors detailing the difference between a tax-saver FD and a regular FD:

· Tax Benefits

As mentioned earlier, the main distinguishing factor between both types of FDs is the tax benefits. Tax-saver FDs are ideal for individuals looking to reduce their taxable income. Investments of up to ₹1.5 lakh in a financial year are eligible for deductions under Section 80C of the Income Tax Act. This makes them an ideal choice for those who want to increase their tax savings while earning stable returns.

In contrast, a regular FD does not offer such tax benefits. The interest earned on regular FDs is fully taxable and added to the investor’s gross income as per their income tax slab.

· Tenure

Tax Saver FDs come with a mandatory lock-in period of 5 years. This ensures disciplined saving, but restricts liquidity during this time. 

On the other hand, a regular fixed deposit offers a broader range of tenure options – from as short as 7 days to as long as 10 years. This means investors can choose a tenure that aligns with specific financial goals, such as saving for a short-term expense or a long-term plan.

· Liquidity

A tax-saver FD is locked in for five years. No early withdrawals or loans are permitted during this period. This reduces their flexibility and makes them less helpful in emergencies.

On the other hand, one of the major benefits of a fixed deposit of the regular kind is that they offer better flexibility when it comes to accessing funds. They allow you to withdraw money early or take a loan against the deposit. This makes regular FDs a suitable choice if you might need quick access to your money.

However, note that withdrawing early may involve some penalties set by the bank. 

· Interest Rates

Both types generally offer an attractive and competitive fixed deposit interest rate. A tax-saver FD will provide rates similar to or comparable to regular FDs of a similar tenure. 

For senior citizens, both options often include an additional interest rate benefit. It can be around 0.5% higher than standard rates. 

· Earnings and Payouts

You can choose the way interest is paid out in either of the fixed deposits. You have two options: you can receive interest regularly, like every month, quarter or year. Or you can get the total earnings at once at maturity. 

However, since a tax-saver FD has a 5-year lock-in, you need to commit to the full term to enjoy its returns. If you are using a tool like the FD calculator, you can get an estimate of your overall earnings for your tenure. However, note that this is only an estimate. Actual returns may vary. 

Also Read: Tax Planning with Fixed Deposits- A Comprehensive Guide

Conclusion

Choosing between a tax-saver FD and a regular FD depends on your financial goals. If reducing taxable income and securing a disciplined 5-year investment is your priority, a tax-saver FD is ideal. Conversely, for short-term goals or liquidity needs, a regular fixed deposit is more suitable.

Whichever is your preference, IndusInd Bank has the solution for you. We offer high interest rates, hassle-free booking, multiple interest payout options, and more to help you achieve your financial goals with ease. Our tax-saver FD goes one step further and helps you save tax as well. So, what are you waiting for? Book an FD with IndusInd Bank now! 

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.