Pros and cons of tax saver fixed deposits: Making informed decisions

Two friends, Shaheen, and Rahmat found themselves in a conversation about financial planning. Rahmat, the pragmatic one, had recently stumbled upon the concept of Tax Saver Fixed Deposits (FDs), and he was eager to share his wisdom with Shaheen.

Shaheen: Hey Rahmat, what is Tax Saver FD you’ve been raving about lately?

Rahmat: Oh, Shaheen, my friend, Tax Saver FDs are a fantastic way to save on taxes and grow your wealth. It’s same as killing two birds with a single stone. You park your money, and it grows while saving you from the taxman’s grip.

Shaheen: Really? Tell me more.

And so, Rahmat began to unfold the pros and cons of investing in Tax Saver FDs, using simple words and relatable scenarios.

The pros

Fixed returns

Shaheen learned that Tax Saver FDs offer fixed interest rates, ensuring a predictable and steady income.

Tax benefits

Rahmat explained that investments in Tax Saver FDs are eligible for deductions under Section 80C of the Income Tax Act, helping individuals reduce their taxable income.

Lock-in period

Rahmat emphasised the lock-in period of 5 years, helping investors cultivate a disciplined savings habit.

Nomination facility

Rahmat highlighted the ease of passing on the investment to a nominee in case of unforeseen circumstances.

Safety net

Shaheen felt reassured knowing that Tax Saver FDs are a low-risk investment option, backed by the stability of banks and financial institutions.


Shaheen appreciated the hassle-free application process and the ease of managing Tax Saver FDs online.

Loan against FD

Shaheen discovered that he could avail loans against his Tax Saver FD, providing financial flexibility when needed.

Suitable for risk-averse investors

Rahmat pointed out that Tax Saver FDs are perfect for those who prefer safety over high-risk investments.

No market fluctuations

Rahmat explained that unlike mutual funds or stocks, Tax Saver FDs are not influenced by market fluctuations.

Senior citizen benefits

Rahmat shared that senior citizens enjoy additional interest rates, making it an attractive option for retirees.

Stable monthly income plan

Shaheen was intrigued to learn that some banks offer a monthly income plan with Tax Saver FDs, providing a regular income stream.


Rahmat stressed the importance of diversifying one’s investment portfolio, and Tax Saver FDs provide a stable foundation.

Easy renewal options

Shaheen appreciated the simplicity of renewing Tax Saver FDs after the lock-in period, ensuring continuous growth.

Compounding benefits

Shaheen realised that the interest earned on Tax Saver FDs compounds quarterly, enhancing overall returns.

Competitive interest rates

Rahmat highlighted that many banks offer competitive interest rates, making Tax Saver FDs a lucrative investment.

The Cons

Fixed returns

Rahmat, acknowledging the stability of fixed returns, cautioned Shaheen that they might not match the potential returns offered by riskier investments such as equities or mutual funds. The predictability of fixed returns provides a safety net, but it comes at the cost of potentially missing out on higher returns that a more volatile market could yield.

Lock-in period

Shaheen, valuing financial discipline, found the 5-year lock-in period of Tax Saver FDs to be a double-edged sword. While it ensured a committed savings approach, he was wary of the limited liquidity during this period. This restriction might pose a challenge for individuals who anticipate needing quick access to their funds in emergencies or for short-term goals.

Taxation on interest

Shaheen was intrigued by the tax benefits on the invested amount under Section 80C but was disappointed to learn that the interest earned on Tax Saver FDs is taxable. This taxation on the interest earned diminishes the overall tax advantage, and investors need to factor in this liability when assessing the returns.

Premature withdrawal penalty

Shaheen frowned upon the penalty associated with premature withdrawal before the completion of the lock-in period. This restriction serves as a deterrent for those who might need immediate access to their funds, emphasising the long-term commitment required for Tax Saver FDs.

Inflation impact

Rahmat, ever the realist, warned Shaheen about the silent adversary known as inflation. The fixed returns on Tax Saver FDs might struggle to keep pace with the rising cost of living, potentially eroding the real value of returns over the 5-year lock-in period.

Limited liquidity

Rahmat admitted that the limited liquidity of Tax Saver FDs might not be suitable for everyone. Individuals requiring quick access to their funds for unforeseen circumstances or investment opportunities may find this aspect restrictive compared to more liquid alternatives.


Rahmat clarified that the non-transferability of Tax Saver FDs between banks limits flexibility. If an investor wants to explore better interest rates or services offered by another bank, they will need to wait until the completion of the lock-in period or forego the tax benefits by withdrawing prematurely.

Not ideal for short-term goals

Rahmat, the voice of reason, cautioned Shaheen that Tax Saver FDs are best suited for long-term goals due to the 5-year lock-in period. Investing in these instruments with a short-term objective might not align with the intended benefits and could result in missed opportunities for liquidity and better returns elsewhere.

Interest rate fluctuations

Shaheen, understanding the nuances, realised that the interest rates on Tax Saver FDs might not keep pace with inflation. In a dynamic economic environment, fixed interest rates could lead to a situation where the real returns diminish over time.

Market-linked returns

Shaheen, with an eye for potential opportunities, missed the potential for higher returns that market-linked investments might offer. Tax Saver FDs, being fixed-income instruments, lack the dynamic nature of market-linked investments that have the potential for higher but riskier returns.

As the conversation unfolded, Shaheen and Rahmat weighed the pros and cons, contemplating the best course of action for their financial goals.


In the end, Shaheen, and Rahmat, armed with knowledge, realised that Tax Saver FDs were like a sturdy anchor in their financial journey. While the cons were worth considering, the pros outweighed the drawbacks, especially for those seeking stability, tax benefits, and a reliable monthly income plan.

As they bid farewell, Shaheen and Rahmat left with a resolve to make informed decisions, each choosing the path that aligned with their unique financial aspirations.