Tax saver fixed deposits in India earn you more

Tax saver fixed deposits in India earn you more

The diminishing popularity of fixed deposits due to constant decrease in fixed deposit interest rates, got a boost when the Indian government announced in 2006 that, bank fixed deposits booked by an individual/HUF for 5 years and up to Rs. One Lac or Rs. 100,00/- will be eligible for exemption. This exemption would be under section 80C of the income tax act 1961, provided the investor makes necessary declarations. This is the same section where we take exemption for life insurance policies, Mutual Funds, etc. The fixed deposits which were giving interest rates up to 14% or more a decade back have recently slump to around 10%. However, as soon as the announcement from income tax department came, fixed deposit again became darling of the investors.

 

Salient features of tax saver fixed deposits

The fixed deposits can be purchase for a minimum amount of Rs. 100, and then in multiples of Rs. 100. The maximum amount eligible under a tax saver fixed deposit is Rs. 100,000 for a financial year. You would be able to claim a maximum of Rs. One lac as a tax deduction. This fixed deposit is locked for a 5 year period and money can't be withdrawn nor can it be pledged for any reason during this tenure. Though the interest rates are varying very frequently and can change in the future, the currently prevailing interest rates on a tax saver fixed deposit is around 8.25% for normal citizens and 8.75% for senior citizens.

This tax saver fixed deposits do not have the sweep-in facility. It means that this fixed deposit cannot be linked to a savings account and the surplus funds available under the savings account cannot be automatically invested in this fixed deposit. In addition to it there is no overdraft facility available on the tax saver fixed deposit. As this instrument of saving money is special due to its tax saving status, banks do not extend relationship benefits on the tax saver fixed deposit.

 

What if two people invested in the same tax saver fixed deposit?

In case two people invest in a tax saver fixed deposit, and become joint holders of the same, the tax benefits under the section 80C of income tax act will be available to the 1st holder. The second holder won't be able to enjoy any tax deduction benefits on such a jointly held tax saver fixed deposit. Anyone who is an Indian resident or Hindu undivided families (HUF) can apply for a 5 year tax saving fixed deposit.

 

Interest rates on tax saving fixed deposit in India

The interest rates on tax saving fixed deposits are generally calculated on a quarterly basis and the interest is reinvested into the fixed deposit. So, after every quarter the principal increases by an amount earned as the interest in the last quarter. If the tax saver fixed deposit calculates interest rates on a monthly basis the rate of interest offered on such fixed deposits will be considerably lower than those calculated on a quarterly basis.

Tax savings fixed deposits are the easiest tax savings vehicles for section 80C. They might not be the best investment options for your financial growth when compared with insurance policies and tax saving mutual funds - but are simple, fast and give you peace of mind.

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Regular fixed deposits in India: Great way to earn more interest than savings account

Regular fixed deposits in India: Great way to earn more interest than savings account

Fixed deposits can help you secure your hard earned money for long durations while giving you higher risk-free returns on your money than regular savings account. With the stock market performing phenomenally, the popularity of fixed deposits have declined but, they are regaining ground at a gradual pace.

As the name implies a fixed deposit is a financial instrument meant for people who want to deposit their money with banks for a fixed duration ranging from 15 days to 5 years and above, and earn a higher rate of interest on their money than conventional savings account. After the maturity of fixed deposit the investor gets a return which is equal to the principal plus the interest earned on this principal over the entire duration of fixed deposit.

Fixed deposits have been very popular among investors and keeping this fact in mind banks in India have a wide variety of fixed deposit schemes to suit almost every need.

 

Interest rates on regular fixed deposits

At current prevailing rates a regular fixed deposit can earn you an interest up to 8.75% and senior citizens who opt for such a fixed deposit scheme are eligible for an additional 0.5 percent increase, which makes the effective interest rate 9.25% for certain fixed deposit intervals.

Fixed deposits though are invested for a certain time period but they can be a source of money and funds can be withdrawn partly, from fixed deposits in times of need. Depending on the bank's policies, this withdrawal may or may not attract penalty.

 

Features of a regular fixed deposit

The interest rates on regular fixed deposits are time based and fixed deposit for longer duration attract better interest rates. For example from HDFC Bank, a fixed deposit amount below 15 lakhs of 15 - 29 days will earn 5.50% interest rate for general public and 6.00% for senior citizens. For the same amount , a fixed deposit of 100 - 101 days will earn you an interest rate of around 6.75% and 7.25% if you are a senior citizen. Similarly, for an amount below 15 lakhs a fixed deposit between the period 2 years 15 days - 2 years 16 days will give a 8.75% interest rate return and this will be 9.25% for senior citizens.

 

The power of compounding on your side

The earning potential of fixed deposit is greatly increased by the power of compounding. If the fixed deposit allows the potential to earn compound interest by reinvesting the principal amount along with the interest earned during the period, it can dramatically increase the amount you will get at the maturity of fixed deposit. To get the maximum returns one should compare fixed deposit schemes from various banks before settling for one.

If you have surplus funds, instead of keeping them in your savings account and thereby earning a paltry interest rate, you can add them to your fixed deposit. This way the funds will earn a much higher rate of interest.

 

How to open a fixed deposit?

The process of opening a fixed deposit is very simple and this is accessible to almost all section of Indian population. For example: resident individuals , Hindu undivided families, sole proprietorship firms, partnership firms, limited companies, trust accounts etc. all can open fixed deposits. Banks in India have a certain minimum initial deposit limit like Rs. 10,000 to open a fixed deposit and the value of fixed deposit can be increased in multiples of a minimum amount (for example Rs. 5000). These limits can vary and also depend upon rural, urban or semi-urban nature of population. The limits are very low for rural areas so that even those with a low incomes can open a fixed deposit.

 

Calculation of interest rates and tax deductions on regular fixed deposit

How the interest rate is calculated on your fixed deposit varies from bank to bank. For a fixed deposit of six months or above the banks may calculate the interest on a quarterly basis. In case the tenure of fixed deposit is less than six months the interest is calculated at maturity as simple interest. The compounding factor or interest for re-investment is calculated on a quarterly basis.

Every fixed deposit is subject to the Indian income tax regulations prevalent from time to time. Keeping these regulations in mind banks deduct tax at source from your fixed deposits and issue you a TDS certificate for the same.

Regular fixed deposits bring increased returns on your savings as compared to a regular fixed deposits. These are great instruments for investing money. The fact that they can be used as guarantee for loans and financial transactions make them even more valuable.

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Fixed deposits in India: Benefits, drawbacks and precautions

Fixed deposits in India: Benefits, drawbacks and precautions

Any investment portfolio should comprise the right mix of safe, moderate, and risky investments. While mutual funds and stocks are the favorite contenders for moderate and risky investments, fixed deposits, government bonds etc. are considered safe investments. Fixed deposits have been particularly popular among a large section of investors in India as a safe investment option for a long period.

With fixed deposits or FDs as they are popularly known, a person can invest an amount for a fixed duration. The banks provide interest rates depending on this loan amount and the tenure of deposit. Here are the benefits, drawbacks of fixed deposits and precautions one should take while making such investments.

 

Benefits

1. Safety

The fixed deposits of reputed banks and financial institutions regulated by RBI (Reserve Bank of India) the banking regulator in India are very secure and considered as one of the safest investment methods.

2. Regular Income

Fixed deposits earn fixed interest rates for their entire tenure, which is usually compounded quarterly. So, those who want an income on a regular basis can invest into fixed deposits and use the interest rate as their income. This makes a fixed deposit very popular way of investing money for retirees.

3. Saves tax

With the directives of the income tax department stating that investment in fixed deposits up to a maximum of Rs.100,000 for 5 years are eligible for tax deductions under section 80 C of income tax act, fixed deposits have again become popular. Fixed deposits save tax and give high returns on invested money.

 

Drawbacks

1. Lower rate of returns

While the money invested in stock markets may give you a return of 20% the fixed deposits will yield only about 10%. So, the money grows slowly in the case of fixed deposits.

2. Taxes

The interest earned on fixed deposits is fully taxable and is added to the annual income of the individual. Gains from stocks are considered capital gains while dividends are tax free.

3. Rising inflation can wipe out the interest benefits

The actual benefits or income from fixed deposit can be annulled by a rising inflation. Suppose the inflation which is currently at 3 % rises to about 6%, your fixed deposit at 10% annual return will effectively yield only(10%-6%) = 4% of return. This return would have been (10% -3%) = 7% if the rate of inflation had not changed. This can drastically eat into your fixed deposit income.

 

Precautions

1. Company fixed deposits

Company fixed deposits are not considered as safe as fixed deposits from leading banks and financial institutions regulated by the RBI. So, if a company runs into losses or goes bankrupt the money invested into its fixed deposit can be lost. To lure investors, such companies offer a fixed deposit interest rate which is much higher than those offered by banks. Before investing in any company fixed deposit it is advised to check the credentials of the company.

2. Interest rate compounding period

The interest rates offered on fixed deposit vary greatly with banks and tenures. Whether the interest rate is compounded quarterly or monthly will determine how much a person earns from his fixed deposit. A fixed deposit with interest rate compounded monthly will earn more than one which is compounded quarterly. It is therefore advised to shop around for the right fixed deposit scheme.

3. Premature ending of fixed deposits

Banks will impose a penalty if you break your fixed deposit before the maturity period. Make sure you get the facts right about this thing. How the bank calculates this penalty and what all charges will it levy when you break a fixed deposit should be noted carefully.

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Guide to TDS on fixed deposits in India

Complete guide to TDS on fixed deposits in India

Fixed deposits earn a higher rate of interest than regular savings account. Interest is also a source of income and hence is governed by the income tax laws of India. The income tax authorities give direction to banks and financial institution issuing fixed deposits to deduct the income tax at source on fixed deposits if they qualify.

 

When do the bank deduct TDS on a fixed deposit?

If the total interest earned on all your fixed deposits in a bank is greater than Rs. 10,000 in a financial year, you are liable for TDS and the banks will deduct the income tax at source. The tax liability for the purpose of TDS is determined at the branch level. Even if a fixed deposit is in the name of a minor it will attract TDS and in this case the credit for TDS can be claimed by a person managing the minor's income. Whenever the bank pays an interest on your fixed deposits, it checks it for TDS eligibility. If it qualifies, the TDS is deducted. TDS is also deducted on interest accrued (but not yet paid) at the end of the financial year viz. 31st March every year.

The rate at which TDS is deducted varies according to the category of account holders.

 

TDS rates for a fixed deposit held by resident individual and HUF

If the fixed deposit holder is a resident individual and HUF, for a payment of up to 10 lacs, TDS will be deducted at a rate of 10% in addition to it there is an education cess of 3% which takes the total deduction to 10.3%. For a fixed deposit of resident individual or HUF with payments equal to 10 lacs or more the TDS rate is 10%, in addition to it there is a surcharge of 10% and educational cess of 3% this takes the total deduction to 11.3%

 

TDS rates for a fixed deposit held by corporate body

If the fixed deposit holder corporate body, for a payment of up to 1 crore TDS will be deducted at a rate of 20% plus an education cess of 3% which takes the total deduction to 20.6%. For a fixed deposit of corporate body with payments equal to 1 crore or more the TDS rate is 20% in addition to it there is a surcharge of 10% and educational cess of 3% this takes the total deduction to 22.6%

 

Effect of change in fixed deposit portfolio on TDS

Any change or enhancement in fixed deposit portfolio affects the TDS liability. If your changed portfolio earns a interest which falls under the ambit of income tax laws, you will be liable for TDS on your current portfolio. In case the interest on your current portfolio is not sufficient enough to cover the TDS, it will be deducted from the principal amount.

 

What to do if you think that your TDS on fixed deposit is exempted?

If a fixed deposit holder finds that his total interest income from fixed deposits won't fall within the overall taxable limits, he should immediately inform this to the concerned bank and ask them not to deduct the TDS from his fixed deposit account. This can be done by submitting a form as per Income tax regulations. Individuals, claiming such exemption have to submit form 15H, companies form 15AA, association of companies form 15AA and trusts must provide details in form 15AA. The form 15AA can be obtained from the assessing officer of the income tax department. In case there is an amount deducted by way of TDS on the interest earned on you fixed deposit, prior to your submission of application of exemption with the required documents, it won't be refunded. However, in all such cases banks will issue TDS certificates which can be used by the fixed deposit holders, while filing his income tax. If you open a fresh fixed deposit account with the bank and want exemption you will have to submit details in a new form. The older one submitted for an existing fixed deposit will not suffice.

For any TDS deducted by the bank, it will issue a Form 16A which can be used to substantiate the facts, while filing the income tax returns.

Remember, that any exemptions claimed don't help you save tax, since in your final Income Tax Return you would end up paying the tax with possibly interest penalties.

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