To get to the depth of tax savings in Fixed Deposits, let us first understand the basics.
So, what is a Fixed Deposit Account?
- Fixed Deposit accounts are investment instruments offered by leading financial institutions and banks.
- This form of investment requires investors to assign a principal amount as a lump sum over a period of time.
- Throughout the investment tenure, the investors are rewarded with a Fixed Deposit interest rate.
- Fixed Deposit interest rates are much higher as compared to regular savings bank accounts.
- Towards the close of the tenure, investors have two options - either to reinvest in a Fixed Deposit for another term or withdraw their money.
What are some of the most prominent benefits and features of Fixed Deposit Accounts?
- Fixed Deposit schemes offered by financial institutions range from 7 days to 10 years.
- Fixed Deposit yields interest rate can be compounded periodically. This can either be annually, quarterly or monthly.
- There is a slight edge that senior citizens have over regular customers - it is that they enjoy 0.50%* p.a. higher Fixed Deposit interest rate returns.
- Fixed Deposits do allow partial and premature withdrawals but this comes along with penalties.
- Since premature withdrawals are possible, they come handy during times of crisis.
- There is a possibility for obtaining loans against Fixed Deposits.
- If investment tenures are sustained for a longer time, then guaranteed returns are awarded irrespective of market highs and lows.
- Financial institutions are regularly monitored by the RBI. Hence the security of investment is relatively higher.
- Compounded Fixed Deposit interest allows a corpus fund to grow at a much faster rate.
What is the taxation criteria on earnings from Fixed Deposits?
- Tax-payers can enjoy income tax deduction if they invest Rs.1.5 lakh in a tax-saver Fixed Deposit account as laid down under Section 80C of the Income Tax Act.
- Fixed Deposit schemes ensure that the due returns and capital protection is provided to investors.
- The scheme ensures returns along with capital protection.
- The interest income in this type of account is fully taxable.
- Tax liability is one factor which is totally based on an individual's accumulated total income in a given financial year.
- Tax is computed based on the tax slab you fall under.
- Interest income is taxable under the head of Income from Other Sources
- Taxpayers face an additional liability to be discharged - which is TDS (tax deducted at source) - this is applicable if the interest income earned exceeds INR 40,000 in a financial year.
Methods to avoid Tax Penalties on Premature withdrawal on FDs:
1. FD Laddering:
In case of FD laddering approach, what one can do is make multiple small investments in FDs rather an investing a huge capital in a single consolidated Fixed Deposit account
Let us assume you have a capital of INR 5 lakhs. Instead of opting for one Fixed Deposit account, you can divide this contribution equally and create multiple accounts
This will help you gauge multiple Fixed Deposit maturity periods of 1,2 or 3 years and allow you to go for premature withdrawal in different timelines when required
It is not mandatory to divide the amount equally, however as per your convenience you may look at the Fixed Deposit interest rates and maturity periods
2. Opt for Loan against your Fixed Deposit:
Several banks permit taking a loan against respective FD account - this allows FD owners to maximize the facility and get loans as high as up to 90% of the FD amount
The usual interest rate of loans is slightly higher than the Fixed Deposit interest rate - 1% or 2% approx.
This is one of the safest and most-used methods to avoid tax complexities
3. Sweep-in facility:
This is one of the widely recognized facilities provided by the banks, wherein you already have a savings account of your own
Under this system, the bank allows transfer of even a higher amount as mentioned by the account holder from a savings bank account to a sweep-in Fixed Deposit account
Rate of interest varies from bank to bank but the maturity period usually ranges from 1 to 5 years
The X-factor of this method is it allows a higher rate of interest, encourages you to maintain a dedicated corpus fund for emergencies - which does not disturb your regular investment
Even if you withdraw money from the account, the balance fund will continue to draw the same rate of interest
To generate the TDS certificate for your current investment with Shriram Finance, please log in to our Customer portal.
TDS Avoidance:
In India, FD investments are charged with the Tax Deducted at Source (TDS).
- Self-declaration can be submitted: In case the interest on FDs, along with final taxable income in that particular FY, is within the prescribed taxable limit, then you can submit form 15G form for tax saving or 15H form for tax saving based on applicability.
- How to identify form applicability: The general public can use Form 15G and senior citizens can use Form 15H. People need to be residents of India, either over 60 years of age or with income within prescribed tax limit. Both these forms are quite helpful and are easy to fill in too.
Hence, these methods allow you to invest your funds in small accounts wisely and be exempted from penalties, if any, in case of an emergency or premature withdrawal from your account.
You can utilize the online calculator - Shriram Finance Fixed Deposit Calculator to work out your total investments and estimated returns on an annual basis. You just need to fill in your total investment details and tenure period along with Fixed Deposit yield interest rate and you can arrive at final estimated returns, etc. This will help you to plan your portfolio and allocate your financial resources accordingly.
Chalking out a structured approach will help you to generate maximum returns, be financially independent and meet all your personal financial goals in good time. You can go to our website and reach out for guidance for your future plans.
