A fixed deposit is an investment in a bank, or an NBFC (Non-Banking Financial Company) where your money is deposited with a specified lock-in period.
In return, you earn interest that is accumulated and paid back to you after the specified term of the fixed deposit. The fixed deposit interest rates are influenced by various macroeconomic factors and generally vary between banks.
Preferred as a safe haven to park your savings, fixed deposits have been in favour for decades now. Despite a number of other financial instruments foraying into the market, fixed deposits continue to hold their charm.
Not only risk averse investors, but others are also choosing fixed deposits as an investment option as well.
Benefits you Reap by Investing in Fixed Deposits
Minimised Risk: While the equity market is ridden with high risks, fixed deposits in banks are exposed to negligible risk. If you are a smart “rather safe than sorry” investor, fixed deposits work best for you.
Returns Assured: If you are looking at a steady rate of return, than fixed deposits are for you.
Capital Appreciation: This is guaranteed when you invest in fixed deposits.
Do all Fixed Deposits Qualify for Tax Benefits?
If you opt for a fixed deposit plans that comes to maturity only after one year, you won’t be earning any tax benefits. If you lock in your fixed deposit with a value up to Rs.1 lakh for a period of 5 years though, the amount is eligible for deduction from your taxable income as per Section 80C of the Income Tax Act.
So, when interest rates on fixed deposits are high, you can rake in the double benefit of high returns as well as deductions from your total income, which will eventually lower your tax liability.
Interests paid on fixed deposits are not tax-free. This amount is included under “income from other sources” and is taxed according to the slab in which your taxable income falls. Further, the interest income is also subject to TDS (Tax Deducted at Source).
In order to avoid TDS, you can split your FD’s amongst different banks. In case you are a senior citizen, or if you have no taxable income, you can instruct the bank to refrain from deducting TDS by furnishing Form 15H/15G.
Fixed deposits are an undeniably popular investment option. By choosing to go a step further and investing in a tax-saving fixed deposits with lock-in periods of 5 years is worth the effort.