Fixed deposit tax and other features

Stock market is not the place to be for conservative investors. If you do not have time for research and you don’t understand how market behaves, it’s recommended to keep safe distance. Uninformed investors should opt for safer investment avenues like Bank Fixed Deposit and if you are a little more adventurous, you can go for company fixed deposits.

Today, banks are offering interest rates on fixed deposit in the range of 7 to 9.25%. Bank Fixed Deposit is quite safe as most of the banks employ enough checks and balances so that people’s money is not at risk. RBI too backs all the banks with respect to deposits and there is no scope for default. Bank Fixed Deposit is the most popular investment in India and high interest rate scenario makes it more attractive. Investor is worry free regarding research and can sit at home without worrying until the tenure of the deposit completes. There is enough flexibility in terms of premature closing, tenure and interest payments that makes this option desirable. Let’s find out how good this investment option is and who should opt for it.

Important Features of Fixed Deposit

• Tenure of Fixed Deposit varies from 7 days to 10 years
• The interest can be compounded quarterly, half-yearly or annually
• Minimum deposit amount is Rs 1,000 and there is no upper limit
• Frequency of interest payment is on monthly or quarterly basis and interest reinvestment option is also available
• Interest Income is Taxable

Why you should invest in Bank Fixed Deposit?

Fixed deposits are touted as one of the safest investments and one should consider investing in them because of following reasons

Safety Concerns:

Investors, who are more concerned about safety, should go for bank FD. There is almost zero default risk and no uncertainty in the future cash flows. You can align tenure of the fixed deposit with your long-term goals like child’s marriage or education.

Source of regular income:

Bank FD can be used as source of regular income, since interest on the Fixed Deposit account is credited to the savings account specified by the holder on a monthly or quarterly basis.

Addressing Emergency Capital Requirements:

In case of emergency, you can withdraw money prematurely, subject to some penalty, as prescribed by the bank on the date of deposit. You can also avail loan facility up to 90% of principal and accrued interest. Almost all the banks provide this facility against your Fixed Deposit.

Extra Benefit for Senior Citizens:

Senior citizens get extra benefits in the form of higher interest rates which are 25 to 50 basis points above the normal rates.

Tax Implication

The taxation rules on fixed deposits are quite simple. The interest earned on Fixed Deposit is added to the total income of a person and then taxed according to his tax slab. Also, if the total interest earned on all your fixed deposits is higher than Rs 10,000 in a financial year, tax is deducted at source as per the Income Tax Act, 1961.

The principal amount invested in fixed deposits with a maturity period of over and above 5 years is eligible for tax deduction under section 80C, but the interest earned on the deposit is still taxable.

Investment in fixed deposit gets slightly disappointing if we take taxation into consideration especially for an investment of tenure less than five years. Adding inflation in calculation makes the situation worse.

Conclusion

Investment decision always works on risk reward concept. No investment option is better than the other. It is the investor who has to decide what he wants from any investment and then invest accordingly. Although the taxation rules make this option a little less attractive, once we take time and knowledge factors into consideration this, weakness turns into strength.

courtesy : investmentyogi