Fixed deposits are a time-tested investment tool you can leverage to meet different financial goals. From earning compounding returns to stabilising your portfolio with capital protection, FDs offer a range of benefits to investors. However, when it comes to tax saving, most investors disregard FDs and opt for other investments like PPF and NPS. Many investors are unaware of tax-saver fixed deposits and, therefore, disregard FDs as a viable tax-saving instrument. Introduced in 2015, tax-saver FDs are designed to ensure tax efficiency. Tax-saver FD investments qualify for tax deductions u/s 80(C) to help you save for long-term goals and earn compounding returns over a 5-year tenure.

But before you invest in a tax-saver FD, you must thoroughly assess the differences between a regular FD and a tax-saver FD. In this article, we sum up the FD vs. tax-saver FD debate in detail to help you understand the pros and cons of investing in each and choose one that best meets your investment requirements.

• Tax-saver FDs have a fixed lock-in period of 5 years, which is absent in regular FDs.

• Unlike regular FDs, investments in tax-saver FDs qualify for deductions u/s 80(C) offering attractive tax-saving perks to the investor.

• Regular FDs offer premature withdrawals and liquidity benefits, while tax-saving FDs do not permit withdrawals before the lapse of the 5-year tenure.

When reviewing a regular FD vs. tax-saver FD comparison, you must factor in the mandatory lock-in period that comes with the latter. Tax-saver fixed FDs come with a mandatory lock-in period of 5 years. You cannot without your investment from the FD account during this compulsory lock-in period. At the end of this lock-in period, you can withdraw the principal plus interest or choose to reinvest the same for an additional 5 years. Regular fixed deposit accounts do not have such mandatory lock-in windows.

As the name suggests, the chief differentiator in a regular FD vs. tax-saver FD debate is the tax treatment of each investment. Investing in a tax-saver FD offers you tax deduction perks under Section 80(C) of the Income Tax Act. In simple words, contributions of up to Rs. 1.5 Lakhs/year into tax-saving FDs qualify for tax deductions under Section 80(C). Tax-saver FDs fall under the ETE (exempt-taxed-exempt) category. Therefore, the principal deposited (up to 80(C) limit) and maturity amount are tax-exempt. However, the interest earned each year in a tax-saver FD is taxable.

Interest earned from regular fixed deposit investments is added to your annual income and taxed according to your applicable income tax slab. Moreover, if the interest earned on your FD investment exceeds Rs. 40,000 in a financial year, a 10% TDS is applicable on the same. For senior citizens, the limit is set at Rs. 50,000. However, if your overall annual income does not fall into the taxable bracket, you can submit Form 15G (Form 15H for seniors) to avoid TDS deductions on your FD’s interest income. This self-declaration form informs the bank/NBFC that your income is below the taxable limit and, therefore, does not qualify for TDS.
 

Also Read: Fixed deposit interest rates

While withdrawing from your regular fixed deposit is generally not recommended, you can still cash out from your regular FD account. Regular FDs generally have tenures that range from 7 days to 10 years. During this tenure, you can choose to partially or fully withdraw your investment to meet immediate cash requirements. Banks generally levy a premature withdrawal penalty of 0.5%-1% on the applicable interest rate when you exercise the liquidity feature of such FDs.
 

Tax-saver FDs are designed to promote long-term savings and, therefore, come with a fixed tenure of 5 years. Due to the mandate lock-in period, you cannot make partial or full withdrawals from such deposit accounts before the maturity date. This means you cannot enjoy liquidity advantages with a 5-year tax-saving FD. This is one of the most crucial points to consider in the regular FD vs. tax-saver FD debate.

In a regular FD vs. tax-saver FD comparison, tenures emerge as a significant point of dissimilarity between the two. Depending on the financial institution you pick, investment tenures of regular FDs can vary from 7 days to 10 years. Most regular FD schemes offer substantial flexibility in investment duration, allowing investors to customise their investments to suit their specific needs. Therefore, you can invest in a regular FD to meet both your short and long-term goals.
 

Alternatively, a tax-saver FD has a singular tenure of 5 years. You cannot choose from a range of different investment tenures to fit your requirements

If you need urgent cash, you can opt for a loan against your regular FD investment. Loans against FDs are a form of secured loan where your FD corpus is pledged as collateral for the sanctioned loan amount. Depending on the lender’s policies, you can secure up to 90%-95% of the FD corpus as a loan. Some lenders also provide an overdraft facility on regular FDs, enabling you to access a line of credit up to the value of your FD corpus.
 

Such loan and overdraft facilities are not available with tax-saver FDs. In simple words, you cannot borrow against your tax-saver FD. Once your corpus gets locked in, it's only accessible after the lapse of the 5-year tenure.