Few tips for investing in Fixed Deposits
Fixed Deposits are considered one of the safest and most trusted investment options in India which get tax benefits as well as steady returns. Fixed Deposits are either kept with Banks or Company but FD kept with Companies is not eligible for a tax deduction, only FD kept with banks for a term period of 5 years is eligible for deduction under section 80C. So we will talk about FD with Bank Only.
But again keeping all the money in one bank or different banks at a single time is not advisable. So here we are giving a few tips by which you can enhance your return on FD.
1. Fixed Deposits are not totally safe
Fixed Deposits we keep in banks are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) but don’t think that you are entirely insured. DICGC insured deposits only up to Rs 1 lakh per customer across all branches of a bank.
So in case you are planning to invest ₹ 5 lakhs in FD, split it into 4-5 different banks to safeguard your investment. Another benefit of doing this exercise is that you don’t need to break your entire deposit in case of contingency. This means that you will have to pay the penalty for premature withdrawal only for the amount that you need, even as the rest of the money keeps growing.
2. Spread your Investments over Years
Rate of Interest on Fixed Deposits tends to move in multi-year cycles. So investing all money at one instance at the low-interest rate is not a wise decision, instead one should build a ladder of fixed deposits which have different tenures.
If you have ₹ 5 lakh to invest, split the amount in five deposits of ₹ 1 lakh each for one, two, three, four and five years. When the 1-year deposit matures, reinvest the maturity proceeds in the 5-year FD. By doing so, the highs and lows in interest rates will balance out over a period of time. This will also ensure liquidity because you will have one deposit maturing every year.
3. Avoid Penalty on Premature Withdrawal
One should always make deposits for the right tenure because breaking FD before the tenure ends attract a penalty of 1%.
Since high tenure always has high-interest rates, one should not get allured towards it. Locking up money for a longer period and then withdrawing before the tenure ends will get you to lower interest rates as well as will slap with the premature withdrawal penalty.
Suppose SBI offers 9% for one year FD and 9.5% for 5 years, you get tempted by higher return and invest in 5 year FD but unfortunately, you require money and break FD in 1 year. Now what you will get is return at 9% instead of 9.5% that too after deducting penalty of 1%, thus making an effective rate of return 8%.
4. Interest earned on Fixed Deposits is Taxable
Interest earned on Fixed Deposit is taxable under the head Income from Other Sources and attracts a tax rate of the tax slab in which you fall. Suppose you are in the tax bracket of 30%, so tax on interest on FD also attracts 30% tax.
Banks will deduct tax at 10% only if the interest exceeds ₹ 40,000. But in every case, you are required to show this income in your tax return and pay tax accordingly. Suppose your interest on FD comes ₹ 45,000 and banks deduct TDS at 10% but you fall in tax slab of 20%, so you are required to show this income in ITR and pay remaining tax i.e. 10%. On the other hand, if your interest on FD comes to ₹ 39,000 then the bank will not deduct anything but again you shall be liable to pay tax at the rate of your applicable tax slab.
In case you are not crossing the maximum income which is not chargeable to tax but your interest on FD exceeds ₹ 40,000 and bank deducts TDS on it. Then you have to file ITR and ask for a refund.
You can also avoid the hassle of filing tax return just to claim tax refund by following ways:
- Submit Form 15G / Form 15H at the beginning of the financial year; or
- Spread of Investment across banks.
One should note that tax on the interest on FD is levied on an accrual basis. You may have invested in a cumulative deposit, but tax will be paid every year.
5. Clubbing of Income
Many assessees deposit money in the name of their spouse or children but this does not save them from tax. Any return on investment shall be clubbed in the income of the assessee. So, if a husband invests in fixed deposits in the name of his wife, the interest earned will be treated as his income and shall be taxed accordingly.
In case of investment is done in the name of minor children (below 18 years) the income earned on FD shall be clubbed with the income of parent whose earning before including children’s income is more. However, one can claim exemption up to ₹ 1,500 per year per child for a maximum of two children.
6. Fixed Deposits at Floating Rate
Generally, deposits are freeze at a fixed rate for a fixed term but there are few banks and non-banking finance companies (NBFCs) that offer deposits at a floating interest rate.
For Instance, IDBI and IOB (Indian Overseas Bank) offer Term Deposits at the Floating rate in which interest rates are declared every quarter i.e. on April 1, July 1, October 1 and January 1 every year.
7. Reinvestment of Interest
Some banks offer the facility of reinvesting the interest earned on Fixed Deposit at the prevailing interest rates.
For example, you get ₹ 5,000 interest every quarter. So the bank will make a new FD at the prevailing interest rate of ₹ 5,000 every quarter and you will get the money at the maturity of the original Fixed Deposit.
8. No penalty
Premature withdrawal of Fixed Deposit attracts penalty but there are some banks who do not charge a penalty on withdrawing money before maturity.
Ing Vysya FD Plus is one such plan which offers zero pre-closure charges i.e. Fixed Deposit can be broken at any time without any penalty.
9. Flexible Term
Mostly Fixed Deposits are made for a particular purpose such as for child marriage or to buy some expensive items etc. but many times these things get postponed and depositor might want to extend the term of the Fixed Deposit. In this case, the depositor has to wait for the maturity and then reinvest it at the prevailing interest rate. The interest rates could be lesser.
Some banks offer a deposit that allows the depositor to extend the term of FD without major changes in other conditions.
10. Fixed Deposits with Insurance
Fixed Deposit does not only increase your wealth but also take care of your health. Some banks provide an accidental insurance policy with bank fixed deposit.
One such product is provided by DHFL. The depositor will get accidental death insurance of ₹ 1 lakhs and for the first depositor in case Fixed Deposit is held jointly.
11. Adding and Breaking fixed deposits
Multiple Deposit of smaller amount for each purpose is a cumbersome process which involves large paperwork.
Banks have introduced products where a bulk deposit is divided into deposits of smaller denominations according to the depositor’s requirements.
Words of Wisdom
Fixed Deposits is a great investment scheme to earn risk-free returns over a long period of time but one must gain knowledge about every possible feature to get the highest returns.