In this unstable economy, when the interest rates are
fluctuating and the stock market ceases to be a very appreciable option. The
Banks are busy marketing their age old, fool proof investment product- “Fixed
The sound of this product brings a relief to the
curved eyebrows. But, again this product is surrounded with some age old myths which
have been passed over from generations, creating a stronghold in the deposit
I: Banks are the only “Fixed Deposit” providers
NO! We have a larger number of companies offering Fixed Deposits.
Guidelines under section 58A of the companies act
enable various companies and financial institutions to offer Fixed Deposits to
retail investors. And the interesting point is that these non –banking
organizations offer a higher rate of interest.
However, banking sector earns the brownie point here,
as it provides a much more secure option to the deposit holders. Bank deposits also
come with insurance for up to a maximum of Rs.1,00,000, good news for all depositors.
the number of regular interest payments, more is the return.
Fact: You get more only when you have a cumulative
Fixed Deposit with return on maturity.
When you opt for a Fixed Deposit scheme, you usually
land up with two options for receiving interest.
One is, at a regular interval, a certain amount (as
per the rates) is credited in your account while in the other one, a cumulative deposit,
where the whole amount (i.e. principal + interest) is received on maturity.
In the second
method, the annualized yield eventually turns out to be higher due to the power
of compounding at regular frequencies. This leads to a chain reaction of higher
the frequency of compounding, higher is the yield of investment.
III: You go for any Five Year Deposit plan and Voila! You have a tax benefit.
No Never! Only a select few five year deposit plans give you a tax benefit.
Section 80C clearly states that investment in a
select few Deposit schemes, for tenure of five years can provide tax exemption
of up to one lakh.
Moreover, such Fixed Deposits must be from a bank,
and the corpus is locked for a tenure during which it cannot be pledged or
withdrawn. The Fixed Deposit certificates much mention the tax benefit
provision on the face of the certificate.
IV: TDS on Fixed Deposit just cannot be avoided.
We have good news; TDS is avoidable provided you have the proper documents.
How exactly is TDS done? Well, TDS on Fixed Deposit
is deducted only when the interest in a single financial year exceeds 10,000 in
case of a bank and 5,000 in case of a company.
However, senior citizens, housewives, minors who do
not have a fixed source of income, or working individuals whose income is below
taxable limit can easily avoid TDS.
The only prerequisite to avail this facility is to
provide a copy of form 15G in case of minor, or Form 15H in case of senior
citizens, well in advance in the respective financial year.
V: I don’t need to declare my Fixed Deposit Interest earning in my Tax Returns.
Apologies! Your Fixed Deposit earning must be declared in your Tax Returns
If you are earning a corpus from your Fixed Deposit
interest that has to be declared during annual Tax Returns Filing. This should
be mandatorily done under the heading “Income from other sources”, while Tax
VI: Premature Withdrawal is the only option at my disposal if I need money mid
Who said? You always have other options available in the time of contingencies.
If at any time you meet with a certain financial
emergency and you need to withdraw, pre mature withdrawal is not the only option
at your disposal. Most banks offer part withdrawal of funds, so that you could
withdraw the actual amount you require, and the remaining balance would
continue to earn interest.
Again , banks also have this innovative scheme of
Flexi deposit where your saving account is linked with you Fixed Deposit , so
that the ideal balance left is transferred to you Fixed Deposit. This enables
you to withdraw money as you do with normal saving account .Thereby saving you
from pangs of pre mature withdrawal.
Overdraft facility is another scheme formed
exclusively to cater to the need of sudden financial requirement. In Overdraft
we can withdraw 80% to 90% of the amount lying with FD account.
However, the only sad part is Tax saving FD does not
have these facilities.
VII: Fixed Deposit gives you a better return than Stock market in the long run.
Reality strikes, with Stock market giving a better return than FDs in the long
True, effective earning from Fixed Deposits is low
as FD’s cannot beat fluctuation of the value of money caused by inflation.
Let me state
an example to explain it, if your fixed deposit earns you an interest, say 9%
p.a. and the current inflation is at 8%, the inflation adjusted return works
out to only 1% (9-8).
A stock market portfolio may probably give you a
much higher effective inflation adjusted returns.