What Happens After Your Tax Saving FD Matures?

Amelia Greyson July 31, 2025 in Finance Tagged FD, Tax - 5 Minutes

A fixed deposit (FD) is often one of the first investment tools that most Indians choose when they begin saving. Among the different types of FDs, the tax saving FD holds a special place because of its dual benefit — it not only helps build secure savings but also provides tax deductions under Section 80C of the Income Tax Act. However, many investors remain unclear about what happens when their tax saving FD matures, and how taxation applies to the interest earned. In this article, we’ll explore what happens after maturity, the rules governing withdrawals, and the tax on FD interest applicable.

Understanding tax saving FD: a brief recap

The tax saving FD is essentially a fixed deposit with a mandatory lock-in period of five years. Its unique feature is that the amount invested qualifies for a deduction under Section 80C, up to a maximum of Rs. 1,50,000 in a financial year.

Key features of tax saving FDs:

Lock-in period: 5 years.
Premature withdrawal is not allowed.
Minimum investment: Usually Rs. 1,000.
Maximum eligible investment for tax deduction: Rs. 1,50,000.
Available to individuals and Hindu Undivided Families (HUFs).
Offered by public sector banks, private banks, and some NBFCs.

These deposits serve both as a risk-free investment and a tax-saving avenue for conservative investors.

What happens upon maturity of a tax saving FD?

After the five-year lock-in period ends, the tax saving FD reaches maturity. At this point, the investor has several options:

1. Automatic credit to savings account

Most banks automatically credit the principal along with accumulated interest to the linked savings account once the FD matures.
Investors receive the entire amount without any further action.

2. Renewal or reinvestment

Investors may choose to reinvest the matured amount into a regular FD.
Fresh tenure, applicable interest rates, and new tax rules apply.
The reinvested FD will not offer any Section 80C benefit, as tax-saving FDs allow deductions only on initial investment.

3. Conversion to cumulative or non-cumulative FD

Investors may reinvest into monthly or quarterly income options depending on cash flow needs.
Returns and tax implications differ based on the option selected.

Calculation example: maturity value of a tax saving FD

Let’s assume:

Investment amount: Rs. 1,50,000
Interest rate: 7.25% p.a.
Tenure: 5 years (cumulative)

Using the formula:

Maturity amount = P × (1 + r/n)^(n × t)

Where:
P = Rs. 1,50,000
r = 7.25% = 0.0725
n = 4 (quarterly compounding)
t = 5 years

Maturity amount = Rs. 1,50,000 × (1 + 0.0725/4)^(4×5)
= Rs. 1,50,000 × 1.419
= Rs. 2,12,850 approximately

Thus, upon maturity, the investor receives Rs. 2,12,850, which includes Rs. 62,850 in interest.

Tax on FD interest: what you owe

While the initial investment qualifies for Section 80C deduction, interest earned during the tenure is fully taxable as ‘Income from Other Sources.’

How tax on FD interest works

Interest earned annually is taxable in the year it accrues, not at maturity.
Tax is charged as per your applicable income tax slab.
No special tax exemption is offered for interest on tax saving FDs.

TDS applicability

Banks may not deduct TDS annually but report cumulative interest at maturity.
For tax-saving FDs, TDS is often not deducted during the 5-year lock-in, but interest must still be reported each year when filing tax returns.
TDS applies if total FD interest across all deposits exceeds Rs. 40,000 (Rs. 50,000 for senior citizens) in a financial year.

Tax example

Total interest earned over 5 years: Rs. 62,850
Approximate annual interest: Rs. 12,570
If investor falls under 20% tax slab, annual tax = Rs. 2,514
Total tax payable over 5 years: Rs. 12,570

Failure to declare this interest annually may lead to tax notices or penalties later.

Can you claim deduction again after maturity?

The Section 80C benefit can only be claimed in the year the investment is made. Once the FD matures, reinvested amounts do not qualify for fresh tax deductions unless invested in other eligible tax-saving instruments.

Reinvestment strategies after maturity

Once your tax saving FD matures, you may consider:

1. Reinvesting into a normal FD

Offers flexibility of tenure and payout options.
Choose cumulative FDs for long-term growth or non-cumulative FDs for monthly income.

2. Diversifying into other instruments

Mutual funds, PPF, NPS, or equity-linked savings schemes (ELSS) can offer better returns depending on your risk profile.

3. FD laddering

Split maturity amount across staggered tenures to balance liquidity and higher returns.

Laddering example:

Total maturity amount: Rs. 2,12,850

Rs. 70,000 into 1-year FD at 6.75%
Rs. 70,000 into 3-year FD at 7.10%
Rs. 72,850 into 5-year FD at 7.35%

Using an FD return calculator helps optimise laddering strategies efficiently.

Common mistakes to avoid

Assuming maturity proceeds are tax-free.
Not reporting accrued interest annually.
Rolling over funds without reviewing current interest rates.
Missing better reinvestment options outside traditional FDs.

Awareness of these issues ensures you manage your matured FD funds optimally.

Benefits of using FD return calculator for maturity planning

Provides accurate maturity projections.
Helps simulate reinvestment scenarios.
Allows tax liability estimation.
Supports better tenure selection based on financial goals.

FD return calculators simplify complex financial decisions into easy, understandable numbers.

Summary

When your tax saving FD matures after five years, your principal and earned interest become fully available for reinvestment or withdrawal. For example, an investment of Rs. 1,50,000 at 7.25% grows to approximately Rs. 2,12,850. However, while the investment enjoys Section 80C benefits initially, interest earned is taxable every year based on your slab under tax on FD interest rules. Using FD return calculators, adopting laddering strategies, and properly accounting for tax liabilities ensures that you continue making informed financial decisions even after maturity.

Disclaimer: This article is intended for informational purposes only. Individuals must carefully assess all advantages, disadvantages and risks before participating or investing in the Indian financial market.