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Bank Fixed Deposits – Park Contingency Funds

Fixed Deposit
Fixed Deposit

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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Copyright © Nitin Bhatia. All Rights Reserved.

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sahil
sahil
10 years ago

Thanks Nitin Sir for sharing this wonderful information
I have a query,
you said interest from FD is taxable after 10,000
so if i earn say just 2.5K in a year still i need to pay tax on 2.5K if I am paying tax in 10% slab

Nitin Bhatia
Nitin Bhatia
10 years ago
Reply to  sahil

As i mentioned, total interest income received from FD is taxable. If interest exceed 10k then TDS will be deducted. Whether TDS is deducted or not, your total interest for FY i.e 12,500 should be clubbed in your total income. Income tax will be applicable as per your income tax slab.

sahil
sahil
10 years ago
Reply to  Nitin Bhatia

Thanks Nitin Sir, for the response

ADRP
ADRP
9 years ago
Reply to  sahil

Is the original amount invested in FD is taxable? FD in a bank was given as reinvestment, monthly payout, quarterly payout, short term etc. Which plan we should choose? Please do clarify.

nn1
nn1
10 years ago

Actually most banks (unless they are really tiny co-operative banks) will have core systems and should be able to track multiple deposits across branches using the pan # and customer id allocated by the bank.
Secondly a liquid mutual fund may be a better option. The funds are available the next day subject to cut offs, the returns are approx 8-9% pre tax regardless of the period that you are invested for, without any penalty.
Hopefully if one can stay invested for more than one year in the growth (since they are contingency funds) with single indexation, the taxation impact is practically nil
Additionally most banks offer investment thru their web banking so there only one time documentation may be required by the bank.

Nitin Bhatia
Nitin Bhatia
10 years ago
Reply to  nn1

I completely agree with you. Thanks for sharing valuable suggestion.

ADRP
ADRP
9 years ago

Is the original amount invested in FD is taxable? FD in a bank was given as reinvestment, monthly payout, short term etc, Which option we should choose? Please do clarify.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  ADRP

If you don’t need regular payout then opt for interest payment at maturity but you need to pay tax for every financial year on accrual basis though you will receive interest at maturity.

ADRP
ADRP
9 years ago
Reply to  Nitin Bhatia

Thanks Sir. But the original amount I invested in FD is not taxed? Is it right? Sorry to ask this question if it sounds silly.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  ADRP

Only interest is taxable. Amount invested i.e. principal is tax free.

ADRP
ADRP
9 years ago
Reply to  Nitin Bhatia

Thanks a lot for your reply.

Dav
Dav
9 years ago

I had a fixed deposit for the very first time which earned interest more than 10000 in Jan 2015. Since the bank people insisted on 15G form I applied for it also not knowing what it is for. I didnt show the interest as income from other source when tax was deducted (10% slab) for my salary in the company. Can this be rectified when I file income tax returns? Or what should be done. Please suggest.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Dav

You can pay self assessment tax to correct this.

Dav
Dav
9 years ago
Reply to  Nitin Bhatia

Thanks Sir. So I have to pay 10% of the interest earned in FD as self assessment tax. Is it right Sir? iam ready to pay by this month itself. Should I pay any fine also? Please clarify. Thanks in advance.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Dav

You need to check whether TDS is deducted by bank or not. Secondly, your income tax slab for FY. After that you can pay balance tax liability.

Dav
Dav
9 years ago
Reply to  Nitin Bhatia

Thank you sir. Bank has not deducted TDS. My income tax slab is 10%. My doubt is whether I need to include 1% interest along with the tax liability for this month (April).

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Dav

Income from FD interest will be clubbed in your income and you need to pay self assessment tax for same.

Jay Arun
Jay Arun
8 years ago

Hi,

I’m on sabbatical from last one year and take up small projects online to just engage myself of some work, my earnings for this year would not be Rs.2.5 lakhs, however I recently sold my flat, earnings from that flat would be invested in another flat in next 1 yr. Now I have invested all the amount through this sale in the FD, should I give 15G to the back so that they don’t deduct 10% TDS as my earnings from this will be less than Rs.2.5 Lacs ?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Jay Arun

You have to include interest from FD in your income. If total income including FD interest is less than threshold limit then you may submit 15G with bank else it will be wrong declaration.

Anne
Anne
7 years ago

Sir I have savings account in SBI. SBI auto sweep some amount and pay
interest on it and has deducted TDS on it. May you please suggest me
whether this interest will be treated as interest on savings account or
FD as per Income Tax Rule. Whether I can deducted Rs 10000/- on the
above interest as per savings interest rule.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Anne

In auto sweep account, the amount above threshold is transferred to the term deposit or fixed deposit. Therefore, interest earned from amount in auto sweep account is taxable as per your income tax slab as per income tax rule for Fixed Deposits.

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