Fixed Deposit

What is a Fixed Deposit?

Fixed deposit is investment instruments offered by banks and non-banking financial companies, where you can deposit money for a higher rate of interest than savings accounts. You can deposit a lump sum of money in fixed deposit for a specific period, which varies for every financier.

Once the money is invested with a reliable financier, it starts earning an interest based on the duration of the deposit. Usually, the defining criteria for FD is that the money cannot be withdrawn before maturity, but you may withdraw them after paying a penalty.

Features of Fixed Deposit

• Fixed deposit enable investors to earn higher interest on their surplus funds
• You can deposit money in a fixed deposit account only once, but to deposit more money, you need to create another account
• Though liquidity in fixed deposit is lesser, you can look for higher rates of interests, which are higher in case of company fixed deposit
• Fixed deposit can be easily renewed
• Tax is deducted at source, from interest on Fixed Deposit as applicable, as per the Income Tax Act, 1961.

Benefits of Fixed Deposit

There are several advantages of fixed deposit investments, some of which have been given below:

• They are the safest investment instruments, and offer greater stability
• Returns on fixed deposit are assured, and there is no risk of loss of principal
• You can opt for periodic interest payouts, to help you manage your monthly expenses
• There is no effect of market fluctuations on your fixed deposit, which ensures greater safety of your investment capital
• You can benefit from higher interest rates offered by company fixed deposit
• Some financiers also offer greater returns for senior citizens

Taxability on Fixed Deposit

The interest earned from fixed deposit is taxable. The tax deducted at source on FD can range from 0% to 30%, depending on income tax bracket of the investor. Financiers deduct 10% TDS if your interest earned is more than Rs. 10,000 in a year, if your PAN details are available with them. However, in case your PAN details are not provided to your financial institution, 20% TDS will be deducted.

If your total income is below the minimum tax slab of 10%, you can claim a refund of the deducted TDS. You can also avoid the deduction by submitting Form 15G to your financial institution, and submitting Form 15H if you’re a senior citizen. If you fall in the higher tax bracket (20% or 30%), you would have to pay extra tax over and above the TDS deducted by your NBFC or bank.

A large number of investors are hesitant to put their money in the equity market due to uncertainties in the finance sector. They look for safer investment avenues that offer assured income sans market risks. Fixed Deposit (FD) is arguably one of the safest investment options. It provides assured returns. By depositing in five-year tax savings scheme, you can also get rebate from the Income Tax department. However, the maximum amount on which you can get tax rebate in the five-year plan is Rs 1,50,000. You cannot invest more than this amount in the tax-saving scheme.

FDs have become more lucrative recently as banks have hiked interest rates. Some banks are even offering interest rates over 7.5% on certain plans. It is also easy to open FD account and make investment as everything, including withdrawal, can be done online.

Some FD investors tend to put their money in long-term plans of 10 years. However, interest rates offered by banks on term deposits of 5-year or less are generally higher than the 10-year plans. By investing smartly, you can make the most of the FD schemes.