Fixed Deposits: The Safe and Secure Way to Invest Money
A fixed deposit (FD) is a financial instrument that is often provided by banks or NBFCs. This provides investors with a higher rate of interest than a regular savings account until the given maturity date.
FDs may or may not require the creation of a separate account. It is also known as a term deposit or a time deposit in some countries like Canada, New Zealand, Australia, The United States, and India. FDs are also known as a bond in the United Kingdom.
It should be noted that a fixed deposit contains money that cannot be withdrawn from an account. This is different in comparison to a recurring deposit or a demand deposit before maturity.
Some banks also provide additional services to fixed deposit account holders like loans against FD certificates at competitive interest rates. It should also be noted that banks offer lesser interest rates under uncertain economic conditions. The interest rate can vary from 4% to 7.5%. The tenure of a fixed deposit can range from 7 years, 15 years, or 45 years.
Fixed deposits are important investment and tax planning tools. You might find it interesting to note that these investments are safer than post office schemes. Income tax and wealth tax benefits are also provided with fixed deposit schemes.
Apart from everything that we have mentioned here, there are several other benefits provided with fixed deposits. Some of these benefits are:
- Individuals can avail of loans against fixed deposits for up to 80% to 90% of the value of the deposits. The interest rate on the loans can also range from 1% to 2% over the rate offered on the deposit
- Residents of India can open fixed deposit accounts for a minimum of seven days
- Investing in a fixed deposit earns individuals a higher interest rate than depositing money simply in a savings account
- There are tax-saving fixed deposit schemes that allow investors to save tax. This benefit is applicable under the Section 80C of the Income Tax Act
Factors Affecting Fixed Deposit Interest Rates
As mentioned before, there are interest rates that are applicable on fixed deposits. It is important for an individual to be familiar with these factors and we’ll help you with that now. The factors are mentioned in a list below.
- Deposit Tenure: As a general rule, the lower the tenure, the lower will be the interest rate, and the higher or medium range the tenure, the higher the interest rate will be.
- Deposit Amount: Higher deposit amounts will fetch an individual higher interest rates. This is especially true for bulk deposits that exceed a value of INR 1 crore.
- Type of Depositor: Senior citizens usually get a 0.25% to 0.50% additional interest rate on all fixed deposits.
Apart from this, the interest rate can also depend on factors like the amount invested, tenure, interest computation frequency, and taxation. If you want to know about the exact interest amount, then you can calculate it by using a fixed deposit interest calculator. These calculators are available online through several resources.
Important Fixed Deposit Rules
Till now, we have discussed several factors and aspects related to fixed deposits. However, the one thing that we haven’t covered is the topic of rules and regulations related to fixed deposits.
To help you get a better grasp of these rules, we have created a list of these regulations. This list of rules is mentioned below.
1. The Tax Deducted at Source on Fixed Deposits:
TDS is deducted by the bank on all fixed deposits at the time of crediting the interest amount accumulated in the account. This is not done at the time of maturity. Usually, a TDS of 10% is applicable if the fixed deposit interest amount exceeds INR 10,000.
It should be noted that this limit is hiked to a total of INR 40,000 for individuals and INR 50,000 for senior citizens. Further, in the case of a permanent account number (PAN) not being provided to the bank, a TDs of 20% will be charged. In the case of Post Office Term Deposit (POTD), no TDS is applicable.
2. Taxation on Fixed Deposit Interest:
The interest amount earned on fixed deposits is completely taxable. The tax amount is determined according to the tax slab bracket with surcharge. For example, if an individual files an ITR of INR 10 lakh, then the amount of interest earned through the fixed deposit will form a part of the taxable income of INR 10 lakh. Hence, the individual will be taxed according to the applicable tax rate.
It should also be noted that if an individual wants to prevent banks from deducting TDS, then one should submit Form 15G or Form 15H. These are self-declaration forms that state that the interest income earned by the individual is less than the taxable limit.
3. Tax Exemption for Senior Citizens:
No TDS amount is applicable on the fixed deposit interest of senior citizens. This rule is applicable provided that the interest amount does not exceed INR 50,000 in a given financial year.
Senior citizens are also eligible for a tax deduction of up to INR 50,000 on the interest income that is earned through fixed deposits. This is applicable as per Section 80TTB.
4. Tax Benefit:
Only tax saver fixed deposits qualify for a tax deduction of invested amount of up to INR 1.5 lakh. This is applicable under Section 80C of the Income Tax Act, 1961.
5. Deposit Insurance:
Deposit insurance is a protection cover that an individual gets on the deposit in banks. This facility is provided by the Deposit Insurance and Credit Guarantee Corporation, which is a subsidiary of the Reserve Bank of India (RBI). The DICGC provides that each depositor in a bank is insured up to a maximum of INR 1 lakh for both the principal and interest amount.
6. Loan Facility:
All banks provide loan facilities to fixed deposit account holders. Usually, individuals can take a loan of up to 90% of their fixed deposit amount or principal amount. The bank also charges one percent higher interest rate than the interest earned on the fixed deposit.
These are all the major rules and regulations about fixed deposits that one should be aware of before investing in a fixed deposit scheme.