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 Deposit”.
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 owner’s mind.
Myth 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.
Myth II: Greater 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.
Myth 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such Fixed Deposits must be from a bank, and the corpus is locked for a tenure during which it cannot be pledged or withdrawn.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.
Myth 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.
Myth 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 Returns.
Myth VI: Premature Withdrawal is the only option at my disposal if I need money mid way.
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.
Myth 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 run. 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.