Investing in a Fixed Deposit? Know these 5 Rules and Regulations!
A lot of people invest in FDs as the fixed deposit interest rates are promising and guaranteed. Though the interest has now lowered, people who do not want to risk it park their funds in FDs. But before you decide to open a fixed deposit account there are certain rules and regulations that you should be aware of:
Returns as high
as 7.1%*
Includes life cover
Completely Tax free+
as 7.1%*
Includes life cover
Completely Tax free+
Maximum returns Offered by
Guaranteed
Highest
7.1%*
Guaranteed Plan
(by insurance companies)
(10 Years)
6.5%**
Fixed Deposits
(by SBI bank)
(5-10 Years)
7.1%***
Public Provident Fund
(other popular options)
(15 Years)
Get Guaranteed returns up to 7.1%*
Fully Tax-Free* (unlike FD), Life Cover Included
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- Investing in a Fixed Deposit? Know these 5 Rules and Regulations!
There is a Penalty on Early Withdrawals
The amount that you invest in your fixed deposits is locked in for the complete duration. So, before you park your funds in a fixed deposit check your financial requirements and liquid funds that you will need for that horizon.
Let’s say you start a 5-year FD then your bank will only permit you to withdraw it after the completion of the tenure. And if you need the money before your FD matures, your bank will levy a penalty. And if the penalty is close to 1%, then you might end up losing the interest earned for that tenure. Therefore, the first rule to invest in FD is to avoid breaking your Fixed Deposits before the maturity date.
Comparison Between
Guaranteed Return Plans
Returns Before Tax
7.5% (TAX-FREE)
Returns After Tax
7.5%
Guaranteed Returns
Yes
Life Cover
Yes
Tax on Profit
Tax Free*
Risk
No Risk
Still Better than FD’s and Debt Mutual Fund
Fixed Deposits
Returns Before Tax
7% (TAXABLE)
Returns After Tax
4.8%
Guaranteed Returns
Yes
Life Cover
No
Tax on Profit
Taxable
Risk
Low Risk
Debt Mutual Fund
Returns Before Tax
8% (TAXABLE)
Returns After Tax
5.5%
Guaranteed Returns
No
Life Cover
No
Tax on Profit
Taxable
Risk
High Risk
*For annual premium upto ₹5 Lacs
Tax Treatment of FD Interest
Interest earned on fixed deposits is fully taxable. It is taxed as per the slab rate that applies to your total taxable income along with applicable surcharge/cess. For instance, if your taxable income for the fiscal year 2019-2020 is Rs. 10 lakh, then the amount earned by you as interest on your fixed deposit will be taxed at 20% (income tax slab rate for taxable income Rs. 10 lakh).
TDS on Fixed Deposits
The tax levied on FD interest is the Tax Deducted at Source (TDS). The bank pays it on your behalf while it credits the interest earned to your account. If the amount of FD interest exceeds Rs 40,000, which was earlier Rs 10,000, the bank deducts TDS at the rate of 20% and at the rate of 10% if you provide your Permanent Account Number or PAN number.
And in case the bank pays a surplus or deficit TDS on your FD interest, then the difference is either received or paid by you. TDS is not applicable on Post Office Term Deposits, therefore individuals don’t need to declare interest earned on POTDs at the time of filing their ITR.
The interest earned on FD is taxable as per your tax slab rates along with Cess or surcharge that is applicable. For instance, if your annual income is above Rs 10 lakh per annum, your tax slab would be 30%. Suppose you earn an interest of Rs 1 lakh then it will be taxed at 30% and 4% additional cess. The TDS rate on FDs is 10% if the interest earned is more than Rs 40,000 during a financial year.
The TDS rate on Non-Resident Ordinary FDs is 30%. However, there is no TDS on Non Resident External (NRE) and Foreign Currency Non Resident (FCNR) Deposits; as these are tax-free FDs. The bank deducts the TDS and the details are uploaded in Form 26AS.
Nevertheless, TDS is not deducted on Post office fixed deposits or recurring deposits. Talking about Senior Citizens i.e. people above the age of 60 years can get up to Rs 50,000 per year in FD interest tax-free. TDS is not deductible for up to Rs 50,000 of the interest received per year for them.
Interest Earned is added to your Income
Like equities and mutual funds, fixed deposits are not as tax-efficient. The interest that you earn on fixed deposits is clubbed with your total income. This income is taxable as per your tax slabs. Let’s say you open a fixed deposit in your spouse’s name, then the money used in FD won’t attract tax but the interest earned will be taxable because it is a part of your income.
For this reason, a lot of people invest in Equity-Linked Saving Scheme (ELSS) as they are tax efficient and also help to grow your wealth, as they earn better returns and have a shorter lock-in period.
Tax-saving Benefits
Tax saver FDs that are opened for 5-years are eligible for tax benefits under section 80 C. The exemption limit is up to Rs. 1.5 lakh. And if you withdraw the amount from your FD account, it will attract penalty charges.
Tax- saving for Senior Citizens
TDS does not apply to investors above the age of 60 years if the interest earned on their FD is not more than Rs 50,000.
FD interest rates India have fallen consistently over the last 12 years.
Additional Tax-benefits
Higher FD interest rates and tax-saving makes FDs a perfect choice for elderly people. They are suitable for people who want to open FD for their parents to ensure a fixed source of income when they retire and grow older. For example, if you open an FD in SBI Bank then SBI FD interest rates range from 3.40% to 6.20% for senior citizens, as of September 2020.
Under the purview of Section 80TTB of the IT Act, senior citizens can claim tax deduction up to Rs 50,000 on the interest earned on their FD.
Loan Facility
All banks in India that have a provision of fixed deposit permit an individual to take a loan of up to 90% against their bank FD. In this case, a one percent higher interest rate is charged by the bank.
Bottom-Line
So, this was all about bank fixed deposits scheme. Before investing you should have some clarity regarding the functioning of a fixed deposit account. It comes with a pre-fixed interest rate, which is 0.5% higher for senior citizens. It helps in saving surplus money and builds a corpus for future financial needs.
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*All savings are provided by the insurer as per the IRDAI approved
insurance plan. Standard T&C Apply
+ Trad plans with a premium above 5 lakhs would be taxed as per
applicable tax slabs post 31st march 2023
#Discount offered by insurance company
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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