Fixed deposits (FD) are one of the most-favored investment instruments in India. FD can be defined as a financial investment where money is invested for a fixed tenure at a pre-agreed interest rate.
There are many varieties of FD schemes available in the market, and an investor can opt one depending on its need and suitability.
Following are some important FD schemes:
- Regular FD Schemes: In this FD scheme, the tenure is fixed for a period ranging 1 week to 10 years. The interest rate of each period is pre determined, and an investor can choose FD for a suitable period.
- Tax Saving FD: This scheme attracts such investors who want to invest for saving income tax. There is a compulsory lock-in of five years under this scheme, and fund cannot be withdrawn before completion of this period.
- Special FD Scheme: Special tenure FD schemes are available in the market where the fund can be invested for a special period like 333,399 or 555 days, and rate of interest is higher for such schemes.
- RD: Recurring deposit (RD) scheme is another popular investment option available to the investors. Under this scheme, investors can regularly deposit a fixed amount every month for a FD of fixed tenure and at a pre decided interest rate. The corpus keeps on growing every month up to the maturity period.
- Floating FD: Under this scheme, an investor can opt for a market-based interest rate. The rate of interest is renewed automatically with the change in the base rate.
Other important points before Opting FD
- Interest Calculation: It varies in the market, and monthly, quarterly, half-yearly and yearly interest calculation are available under different conditions.
- Interest Payout: An investor has the option to reinvest interest and increase the FD corpus or to receive the regular payout every month.
- Penalty: Some institutions penalize for breaking the FD before maturity by lowering the interest rates. Investor can search for such banks/institution that has the lowest penalty for pre maturity liquidation of FD.
Tax Deduction on FD Interest
The interest earned under the FD is taxable under the head “Income from other Sources." The amount invested under 80C of the income tax act, is exempt but the interest earned under such investment are taxable. If the interest earned under FD exceeds Rs 10000 in a financial year, then it would be eligible for tax deduction at source (TDS) at 10% plus 3% education cess i.e total 10.3% of the interest earned. For example, if an investor has earned Rs 20000 as an interest in one year, then the bank would deduct Rs 2000 and pay only Rs 18000 as the amount exceeds the limitation of Rs 10000.
The TDS limits for companies deposit schemes are Rs 5000 only. It means if the interest earned from a company deposit exceeds Rs 5000, then the investors are liable for a TDS on interest.
How to Save TDS on FD?
An investor can save TDS by many ways. Following are some vital points to save TDS on FD:
- By Submitting Form 15G/15H: If the investor submits Form 15G stating that he has no taxable income, then the bank would not deduct any TDS from the interest earned. For senior citizens, the requisite form is 15H to avoid TDS.
- Distributing FD investment: Another way to avoid the TDS is by splitting the FD to separate banks in such a way that interest earned from any of the FD does not exceed the Rs 10000 limits.
- Timing the FD: The TDS can also be saved by timing the FD in such a way that interest for any of the financial years does not exceed Rs 10000. For example, a 12-month FD of Rs 1 Lac @ 10.5% could be started in September as the financial year closes on 31st March so the interest would split in two financial years, and hence TDS could be avoided.
- Splitting FD another way: A person can start FD under personal bank account and another FD under HUF account, and then both can be treated separate. So an investor with HUF identity can split FD under such two heads.
Fixed deposit is an all-time favorite financial investment instrument. It provides a handsome return as well as liquidity at the time of need to an investor. Looking at the volatility, high associated risk and less assured return by other financial instruments, the attractiveness of FD is set to grow in the future.
About the author:
Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent 8 years in Equity research and Stock broking sector. He can be reached at firstname.lastname@example.org
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