What are fixed deposits?
There are a variety of Investment options available to investors, but one of the most common one is fixed deposit.
Fixed deposit is a financial instrument which is offered by banks and other financial institutions in which the investor deposits a certain amount of money in the bank for a specified time period and at a fixed rate of Interest. The term ‘Fixed’ in fixed deposit means that the money you deposit gets locked in with the bank. After the time period is complete the investor gets the principal amount as well as the interest earned on it.
Fixed deposit comes in a wide range of tenures from 7 days to 10 years, you can choose the tenure and the amount you want to invest according to your financial goals.
Fixed deposits are also offered by many Corporates & Companies in India and have a higher interest rate as compared to a fixed deposit offered by a bank.
Fixed deposit is a financial instrument which is offered by banks and other financial institutions in which the investor deposits a certain amount of money in the bank for a specified time period and at a fixed rate of Interest. The term ‘Fixed’ in fixed deposit means that the money you deposit gets locked in with the bank. After the time period is complete the investor gets the principal amount as well as the interest earned on it.
Fixed deposit comes in a wide range of tenures from 7 days to 10 years, you can choose the tenure and the amount you want to invest according to your financial goals.
Fixed deposits are also offered by many Corporates & Companies in India and have a higher interest rate as compared to a fixed deposit offered by a bank.
Features of fixed deposit
Guaranteed returns:
Fixed deposit is a safe avenue for investment as they offer guaranteed and risk-free returns.
Flexible tenure options:
Fixed deposit comes up with flexible tenure option which varies from 7 days to 10 years and the interest rate also depends upon the tenure option which you choose.
Higher returns than saving account:
Instead of parking your funds in a saving bank account you could put that money into a fixed deposit which will fetch you higher returns.
Withdrawal facility:
Account holders have to pay a penalty for pre-mature withdrawal. Penalty amount usually varies from bank to bank but can be anywhere between 0.5-1% of interest income earned.
Tax benefits:
Investment made in 5-year tax saver fixed deposit is eligible for deduction under section 80C for an amount up to Rs 1 Lakh.
Loan against fixed deposit:
Instead of applying for a personal loan where the interest rates would be higher, you can opt for a loan against fixed deposit. Loans granted can be 90% of your fixed deposit value.
Auto-sweep facility:
The auto-sweep facility links your saving account to your fixed deposit account. Whenever the amount in your saving account exceeds a defined limit, the excess cash is automatically transferred into a fixed deposit.
What are the types of fixed deposits?
Regular fixed deposit:
In the Regular Fixed deposit the investor deposits a fixed sum of money in the bank, for a specific period and at a fixed rate of interest.
Flexi fixed deposit:
Flexi fixed deposit allows the depositor of the FD to transfer money from saving bank account to fixed deposit account and vice versa. It is also called auto sweep facility. Depositor instructs bank to transfer any excess amount in saving bank account to an FD, so it can earn a higher interest rate.
Tax saving fixed deposit:
According to Income Tax Act 80C, you get the benefit of Income Tax up to 1.5 lakh per year in Tax-saver fixed deposit with a lock-in period of 5 years. Note that loan against fixed deposit is not applicable for Tax saving fixed deposit.
Senior citizen fixed deposit:
Senior citizen Fixed deposit is created for senior citizens above the age of 60. They earn additional interest of 0.5-1% than regular fixed deposit.
Corporate fixed deposit:
Corporate fixed deposits are fixed deposits that are issued by companies in India. They generally provided higher interest rates as compared to fixed deposits in a bank.
Cumulative fixed deposit:
In a cumulative fixed deposit the interest earned is compounded quarterly, half yearly or yearly but paid only at the end of the tenure with the maturity amount
Non-cumulative fixed deposit:
In a non-cumulative fixed deposit, the customer is paid interest amount at regular intervals whether monthly, quarterly, half yearly or yearly. This is best suited for senior citizens who would want a regular source of income.
What are the tax deductions?
The interest earned on fixed deposits is fully taxable and termed as ‘Income from Other Sources’. However, Banks will not deduct TDS, if you interest income earned from fixed deposits is less than 40,000 in a year. This amount is 50,000 Rs for senior citizens.
If you have submitted Form 15G (in case of citizens under 60) and Form 15H (in case of senior citizens) banks will not deduct TDS. (If your taxable income does not exceed exemptions limits)
If you have submitted Form 15G (in case of citizens under 60) and Form 15H (in case of senior citizens) banks will not deduct TDS. (If your taxable income does not exceed exemptions limits)
Income Slab
Below Rs. 2.5 Lakh
Rs. 2.5 Lakh to 5 Lakh
Rs. 5 Lakh to 10 Lakh
Above Rs. 10 Lakh
TDS Rate Levied By Banks
10%
10%
10%
10%
Income Tax Rate
Nil
5%
20%
30%
Actual Tax Paid By You
0%
0%
10%
20%
If your taxable income is below 5 lakhs you can submit Form 15G/15H can claim TDS as refund in your Income Tax Returns.
If your taxable income comes in the bracket of 20% to 30% you need to pay tax you need to pay tax on interest earned.
If your taxable income comes in the bracket of 20% to 30% you need to pay tax you need to pay tax on interest earned.