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6 Facts You Probably Did Not Know About Fixed Deposits

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Fixed Deposits (FDs) are one of the most desired investment avenues for Indians. Due to their low risk and assured returns, FDs attract investors of all types and ages. Safety of capital is another striking feature of FDs,which makes them a great avenue to park your money.

Today, apart from banks, corporates can also issue FDs in India. Shriram Finance offers one of the highest interest rate on fixed deposit, which makes them a great choice over bank FDs. Shriram Fixed Deposit is the safest investment option with attractive interest rates of up to 9.20%* p.a. inclusive of the 0.50%* p.a. special interest benefit for senior citizens and 0.10%* p.a. for women depositors. You can choose from a flexible tenure between 12 months and 60 months and get regular and assured returns irrespective of market fluctuations.

Among other advantages, get regular and assured returns irrespective of market fluctuations. You can start your investment journey with a minimum deposit amount of ₹5000

Though FDs are popular among Indian households, there are still a few lesser-known facts that you must know about. Here are 6 must-know facts about fixed deposits that you need to know.

#1 You Can Save Tax by Investing in FDs

If you invest in tax-saver FD plans, you will be eligible for tax benefits under Section 80C of the IT Act. Here are a few points you should know about tax-saver FDs:

  • All tax-saver FDs come with a lock-in period of 5 years. During the lock-in period, you won't be able to use a tax-saver FD as collateral to get loans or any other advances.
  • You won't be able to close your tax-saver FD before the end of the lock-in period. The only exception is the investor's death.
  • Returns from a tax-saver FD are taxable as per your income tax slab.
  • In India, only private and PSU banks can issue tax-saver FDs. Corporates, cooperative banks and rural banks cannot.
  • The maximum amount you can deposit in a tax-saver FD in a financial year is ₹1.5 lakhs. The minimum amount varies from bank to bank. Usually, PSU banks have a lower minimum limit.
  • You can open a tax-saver FD in a single or joint account. But in a joint account, only the first holder can apply for the tax exemption.
  • In a joint account, if the first holder passes away during the lock-in period of the deposit, then the other holder can en-cash the deposit.
  • You can't transfer your tax-saver FDs from one bank to another. However, transfer between one branch to another branch of the same bank is possible.

Also refer to this link for more information about FD - Here are the top 10 factors to consider while investing in FDs.

#2 You can Increase Your Returns by Investing in Corporate FDs

Normally, corporate (non-banking finance companies) FDs offer higher interest rates than bank FDs, wherein their benefits are almost the similar to bank FDs. Thus, you can optimise your returns from fixed deposits by investing in corporate FDs.

In comparison with banks, some financial institutions offer higher interest rates. Certain financial institutions, such as Shriram Finance, provide additional interest for women investors and senior citizens. With Shriram Fixed Deposit you can earn interest as high as 9.20%* p.a. inclusive of 0.50%* p.a. for senior citizens and 0.10%* p.a. for women depositors.

#3 You can Save TDS on FDs

The interest you earn from FDs falls under income from other sources for income tax purposes. Hence, it's fully taxable. Banks deduct tax at source or TDS if you earn more than ₹40,000 in interest from a bank in a financial year. For senior citizens, this limit is ₹50,000. The following are a few essential points about TDS:

  • Your FD issuer can't deduct TDS if your interest income is below ₹40,000.
  • No TDS will be applicable if your total income in a financial year is less than the minimum taxable amount.
  • If your interest income exceeds the threshold level, your issuer will deduct 10% of the exceeded amount as TDS.
  • If you fail to provide PAN card details to your FD issuer, TDS will be deducted at 20%.
  • If your total income falls under the non-taxable category, submit Form 15G or Form 15H before the due date. Form 15G is for investors below 60 years, and Form 15H is for senior citizens.
  • On maturity of your FD, your issuer will deduct TDS and deposit the remaining amount in your account.

To know more about your FD returns, use Shriram Fixed Deposit Calculator.

#4 Take Advantage of FD Laddering

Use FD laddering in your FD investment to augment the returns and manage your liquidity. It works as follows:

  • In FD laddering, you will divide your money into equal portions and invest them as different FDs of various maturity periods. For instance, you're planning to invest ₹3 lakhs for 3 years. Instead of depositing the entire amount in a single FD, divide them into three equal parts of ₹1 lakh each. Now invest the first part for 1 year, the second for 2 years and the last for 3 years.
  • At the end of the first year, when your first FD matures, reinvest it for another 3 years. Similarly, at the end of the second year, when your second FD matures, reinvest it for another 3 years and so on. This way, you create a new step in your FD ladder every year.
  • FD laddering works well when interest rates are on the upswing. Suppose, in the above example, when you created the first 3 FDs, the interest rate was at 6%. After 12 months, the interest rate went up and reached 6.5%. So, when you renew your first FD, you'll be able to take advantage of the increased interest rate.

As one of your FDs matures regularly, you'll get easy access to your money. While creating the FD ladder, you can select the maturity period according to your liquidity requirements. Thus, you'll be able to bypass premature withdrawals. You can apply the laddering technique in both bank FDs and corporate FDs.

#5 Penalty on Premature Withdrawal

If you make a partial withdrawal or close the FD before its maturity, you'll be liable to pay a fine to your FD issuer. The penalty varies from one issuer to another.

Before opening an FD account, check your liquidity requirement and how far your financial goal is. Then select the tenure of your FD accordingly. It helps you to avoid premature withdrawals and losing returns of your FD.

#6 Auto-Renewal of Your FD

Nowadays, almost all banks and financial institutions offer an auto-renewal option to investors on their FDs. It is available for both offline and online FD accounts.

Suppose you opted for auto-renewal at the time of the FD opening. Upon maturity, your principal amount and interest earned will automatically be reinvested at the effective interest rate for the same tenure. Auto-renewal is an effective method to maximise your returns if your financial goals are long-term. Some financial institutions like Shriram Finance provide 0.25%* p.a. upon renewal of a fixed deposit plan during maturity.

Conclusion

Investing in FDs is the best option if your risk appetite is low or you're looking for a regular income. As FDs are non-market linked instruments, they ensure the safety of your capital and guaranteed returns.

While investing in FDs, consider corporate FDs like Shriram Fixed Deposit to increase your returns. Book Shriram Fixed Deposit now!

FAQs

1. Do senior citizens need to pay tax on interest earned from FDs?

Yes. If the interest earned from FDs exceeds ₹50,000 in a financial year, the tax will be applied to the excess amount for senior citizens too.

2. Who will be liable to pay the tax in a joint account?

If the FD is opened jointly, the first holder will be liable to pay the tax as the interest is paid to their account.

3. When are interest rates compounded on bank FDs?

Usually, interest rates on FDs are compounded quarterly. Before investing in a scheme, read the FD document thoroughly.

4. Will my FD continue to earn interest if I take a loan against it?

Yes. Your FD earns interest even if you take a loan against it. The advantage of taking a loan against FD in an emergency is that you don't need to close your FD prematurely and pay the penalty for premature closure.

Key Highlights

  • If you invest in tax-saver schemes, you will be eligible for tax benefits under Section 80C of the IT Act.
  • Corporate FDs are a better alternative to bank FDs as they pay higher interest.
  • Use FD laddering technique in your FD investment to maximise the returns and manage your liquidity.
  • If you make a partial withdrawal or close the FD before its maturity, you'll be liable to pay a nominal penalty.
  • Banks deduct tax at source or TDS from your interest if you earn more than ₹40,000 in interest from a bank in a financial year.
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