Fixed Deposit or popularly known as FD is not an Investment tool in Personal Finance dictionary. At the same time FD is one of the most popular saving scheme for all Indians. Personally, i never believed in comparison of different financial products like Fixed Deposit vs Debt Mutual Funds or Fixed Deposit vs Recurring Deposit. Each Financial Product is unique in nature and serves to particular segment of investors. Depending on the financial need, we can select particular Financial Product. Please remember that one size doesn’t fit all.
Its a no-brainer that Fixed Deposit can be opened in each and every Branch of Bank. Fixed Deposit is very easy to sell as it does not require any financial know-how. At the same time we need to understand taxability of Fixed Deposit Interest before signing below dotted line. The biggest conception about Fixed Deposit is that it is “Safest” financial tool. No doubt it has high safety compared to other debt Instruments but do keep in mind that Fixed Deposit is covered under deposit insurance of Rs 1 lac per bank. This amount cover all debt investments like Savings Account Balance, FD or RD.
You can invest in Fixed Deposit online through Net Banking facility. The minimum investment is as low as Rs 500 and there is no upper cap on investment in Fixed Deposit. FD has very high liquidity but sometimes bank charge penalty for breaking Fixed Deposit. Any premature closure of Fixed Deposit attract penalty of 1%. FD booked online can be closed online only in the case of Single Ownership. In case of Joint Fixed Deposit or FD booked in the name of Minor, you need to visit the branch personally to break the Fixed Deposit. It is advisable to open Fixed Deposit online as the Physical FD Certificate can be lost, damaged or stolen. It is very cumbersome process to claim the maturity amount in such situations.
Interest earned from Fixed Deposit is fully taxable. The Income Tax Rate applicable on Fixed Deposit interest is as per the Income Tax slab of the investor. TDS is applicable only if the interest earned from FD exceeds Rs 10,000 during Financial Year. Please note that this cap of Rs 10,000 of TDS include cumulative interest from all Fixed Deposits with a particular Bank Branch. Currently banking system is not that intelligent to deduct TDS if investor has multiple FD’s with different branches of same bank and cumulative interest exceeds Rs 10,000. If the interest exceeds Rs 10,000 than TDS @ 10% + 3 % Education cess i.e. 10.3% will be deducted. Any balance income tax can be calculated by the investor and will be paid as Self Assessment Tax or declare under “Income from other sources” with the employer. Most of the investors’s don’t pay income tax on FD interest as per income tax slab if the TDS is deducted by the bank. Please note if you are in 10% Income Tax bracket and TDS is deducted @ 10% than there is no additional income tax liability. If your income tax bracket is 20% than additional 10% Income Tax on interest should be paid by the investor. Lastly if TDS is not deducted by the bank than kindly add interest received from FD as your income and pay tax as per your income tax slab.
It’s a misconception that TDS can be avoided by splitting Fixed Deposit with different banks or open FD with different branches of same bank. You may avoid TDS but you need to pay Income Tax on the total interest earned from Fixed Deposit during Financial Year. Another imp point to note is that interest earned from FD cannot be claimed as deduction u/s 80TTA. 80TTA provide exemption only for interest earned from deposits in savings account. Deduction u/s 80TTA cannot be claimed for interest from FD or RD.
If the investor’s total income is not taxable than the investor can submit form 15G with the bank stating that he has no taxable income. In this case, bank will not deduct TDS on Fixed Deposit interest. For senior citizens, the form to avoid TDS is 15H.
Fixed Deposit is suitable for
(a) Senior Citizens: Banks offer 0.5% higher interest rate to senior citizens compared to regular rates. Senior Citizens can opt for Monthly Payout option and generate steady income from Fixed Deposits post retirement.
(b) Low Income Tax Slab: The post tax return of Fixed Deposit for investor in highest tax slab of 30% is 6.3% therefore Fixed Deposit is suitable only for investors with zero taxable income e.g. housewives or in lowest income tax bracket.
(c) Park Contingency Funds: As i keep highlighting that we should keep atleast 6 months monthly household expenses as Contingency Fund to take care of emergency situation. Fixed Deposit is best suited to park contingency funds as the Fixed Deposit is very easy to liquidate. Instead of earning 4% interest in savings account, it is better to earn 9% through Fixed Deposit. In higher income tax bracket, the post tax interest differential is approx 3% between savings interest and Fixed Deposit interest.
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