One of the most popular savings instruments in India, Term Deposits or Fixed Deposits, is known for the safety it assures. You can deposit a lump sum amount for a fixed period at a predefined interest rate and get risk-free, guaranteed returns on a monthly, quarterly, half-yearly, and yearly basis. Investors with a low-risk tolerance profile invest in fixed deposit schemes to make a stable portfolio. The FD tenures are flexible and range from 7 days to 10 years, whereas the financial institution sets the interest rate.
Most banks and NBFCs offer the facility to open fixed deposits via offline and online methods. They offer several types of FDs, which include cumulative and non-cumulative FDs, tax-saving FDs, Flexi FDs, etc. Some updated rules and regulations regarding fixed deposits and secure investments are as follows:
- TDS or Tax Deducted at Source on FDs
Tax Deducted at Source (TDS) is deducted when the interest is credited to your account by the financial institution. It is important to note that it is not deducted at the time of maturity. Earlier, a 10% TDS was deducted from the interest amount if the FD interest amount exceeded Rs. 10,000. In the interim budget for 2019, this FD interest limit has been increased to Rs. 40,000 for regular citizens and Rs. 50,000 for senior citizens. If the FD account holder has not provided or linked his/her PAN card to the account number, a 20% TDS will be levied on the FD interest credited to the account. No TDS is applicable on the Post Office Term Deposits or POTD.
- Tax on FD Interest
Like several other incomes, the interest earned on fixed deposits is fully taxable per India’s governing laws. The interest amount from the fixed deposits is clubbed with your total income and a tax rate is determined depending on your tax slab bracket in addition to the surcharge or cess.
Suppose you have an annual income of ₹10 Lakhs, and you file an ITR for it. The interest amount earned from your fixed deposit will be a part of your taxable income of ₹10 Lakhs and will be taxed according to the tax rate applicable. To avoid TDS deduction, you should submit Form 15G or 15H. These are self-declaration forms that state that the interest income earned is less than the taxable limit.
- Deposit Insurance
Fixed deposits are considered mostly risk-free and one of the most secure savings options. The risk option appears only if there is a chance for the bank or NBFC to suffer a collapse. Considering such a scenario, Deposit Insurance and Credit Guarantee Corporation or DICGC, a subsidiary of the Reserve Bank of India (RBI), provides a protective cover on your fixed deposits in banks. The DICGC ensures that the financial institution will provide a maximum of ₹5 lakhs as insurance cover for both principal and interest amounts in the case of FDs. If the organisation suffers a collapse, this amount will be the only relief for the FD account holders.
- Loan Against FD Facility
Several banks and NBFCs offer loans against fixed deposit services. Such a feature offers loans in the form of overdraft facilities. The amount you can avail as a loan depends on the fixed deposit amount and tenure. The maximum loan tenure you can choose will be the remaining deposit period of your FD. You can take up to 90% of your FD amount as a loan. This percentage changes from bank to bank. The lender charges a 1% interest rate higher than the fixed deposit interest rate. Note that if you avail a loan against FD, you cannot withdraw your FD prematurely.
- Tax Benefits and Exemptions for Senior Citizens
Regarding term deposits, various tax benefits and exemptions are offered to senior citizens or people above the age of 60 in India. The majority of the banks and NBFCs offer 0.25% – 1% higher interest rates on FDs for senior citizens. If the interest amount does not exceed ₹50,000 in a financial year, no TDS will be applicable on the term deposit interest of senior citizens. As per Section 80 TTB, a tax deduction of up to ₹50,000 will be given to senior citizens on the interest income earned from FDs.
- Penalty on Early Withdrawals
One of the reasons cited for the inhibition towards fixed deposits for some is the premature withdrawal penalties. Although you can withdraw your deposit even before the end of the maturity period, it is to be noted that a fixed amount will be deducted as premature withdrawal charges. A penalty may cause you to lose a lump sum amount from the interest amount earned on FD or, at times, the total interest earned. The penalty varies from bank to bank and NBFC to NBFC.
Now that you are updated with the latest rules and regulations related to fixed deposits, you can open an FD account at your desired bank or NBFC. Always keep a check on the FD interest rates offered by your preferred banks and NBFCs, as this will help you make the best investment choices.