Advantages and Disadvantages of the Tax-Saving Fixed Deposits
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Updated date : 11 January 2017
Fixed Deposits offer market leading returns, and have an effortless opening and maintenance process. The open-it-yourself accounts also offer tax exemptions, so that you can save tons while gaining interest on your savings.
Fixed Deposit Definition: A fixed deposit is a financial instrument which offers the depositors greater interest returns than the savings account, until its maturity. It may also require the opening of a separate savings account.
Fixed deposits are one of the safest financial investments that an Indian citizen can make. The financial instrument is today provided by a plethora of banks. The fixed deposits are a good investment avenue towards saving taxes also, but have their own set of disadvantages as well. Let us find more about the FDs and discuss their advantages and disadvantages, or the pros and cons.
Pros or Advantages of the Fixed Deposits
The Fixed Deposit scheme is available to all the public and private sector banks in India. You can open the FD, through internet banking as well. There is no need to go to the bank for opening FD if you have the KYC or "Know Your Customer" formalities done at the bank.
FD offer greater interest than the saving accounts. The rate varies between 7 % to 8 %. The interest gains of an FD also vary with its tenure, so that a long-term FD accrues better interest gains. The fixed deposit interest rate comparison charts, available online, will reveal to you which bank is offering the greatest of returns.
The original monetary amount, which the depositor deposits in the FD, is exempt from taxation, under the Section 80C of the Income Tax Act. FDs are a widely used tax saving option by both salaried individuals and workers, and the business persons. The section offers an exemption of up to Rs 1.5 lakhs, towards an FD deposit.
Note: In order to save taxes, you should deposit the FD for a minimum period of 5 years. The maximum deposit limit, relating to tax exemption is Rs 1.5. lakhs.
Provides for Partial Withdrawals
Some banks offer the FD schemes that provide for the partial withdrawals. The balance that remains in the FD account after withdrawal gets the same interest. These FDs are hence more lucrative and can be used to withdraw money, in times of need and crisis.
FDs can also be renewed automatically. You do not even need to go to the bank for its renewal, as it can be managed through the internet banking.
Any Number of FDs can be Opened
One can open any number of FDs at a bank or at multiple banks. The FD is a great way to invest the money that one saves. The interest gained will be exempt from taxation until it reaches the Rs 1.5 lakhs exemption limit.
An FD can also be used for getting a loan. The loan facility helps the depositor to get the finances when he or she requires them. The loan may extend up to 90% of the principal and the interest that has been accrued on it.
FD investments are totally secure. No market fluctuation can affect the interest rates, as in the case of the Mutual Funds, and other market related financial schemes. The interest rate for an FD scheme also remains fixed during a given time period, until it reaches its maturity.
Lock In Period
The FD “Lock In Period” ensures that the deposited amount is not withdrawn or used, and you gain the interest.
Better Interest Rates for Senior Citizens
Fixed deposit interest rates are even better for the Senior Citizens. The interest rates may vary depending on the bank chosen, and the tenure of the FD. It may be as high as 10%. Hence senior citizens can gain much larger income through the deposits, which is just what they need and desire in the old age.
Greater Time Span
While an FD can be made for a period of a week as well, it can have a tenure of up to 20 years. Hence they are fine financial instruments towards making savings for old age, education, marriage, and other purposes.
Option of Opening Single or Joint Account
Two or more individuals can open FD together, through a joint account. Any of the account members can deposit, or withdraw money from the account. This makes the FD accounts easier to operate and maintain.
Open to HUFs
The members of any Hindu family can together form an HUF or Hindu Undivided Family, and open a Fixed Deposit. As HUF is taxed separately (from the individual members of the family), a family can save more on taxes by opening an HUF FD account.
Open to NRIs
NRIs can also open the FDs or Fixed deposit account and can invest in it by depositing INR, or any other foreign currency. The banks in India offer the customized FD plans for the NRIs, and some of them are non-taxable. For instance, the NRE (NonResident External) account in India, opened by an NRI is not taxed upon by the Government Of India. These accounts offer benefits including:
- A rupee FD for the foreign earnings
- All interest earned on the account is exempt from taxation
- The interest accrued at the maturity of the FD is fully repatriable
- NRIs can also take loan on the NRE FD account
FDs are Transferrable
The FD accounts are transferable, in that they can be transferred from one branch of a given branch to another.
FDs are Open to All
The FD has a wide and accommodative canvas. It is open to the individuals, private companies, public companies, the partnership firms, trust, societies, HUFS, NRIs, and others. Hence anyone can deposit money in an FD account and reap the tax exemption advantages.
No TDS When So Desired
The FD depositors can also receive the interest, without the TDS (Tax Deducted At Source) reduced from it. They will have to fill the form 15-H and submit it in the concerned branch of the bank.
Note: This provision is not available when the gains exceed Rs 50,000.
Disadvantages of the Fixed Deposits
Interest are Taxed Upon
All interest gained on the fixed deposits are fully taxed upon. The income is denoted under the head “Income From The Other Sources" when you file your ITR to Income Tax Returns.
There are other financial instruments available, which provide you the benefit of tax-free savings. The PPF and the government bonds, are a few of them.
Interests gained from a FD are also charged with TDS. Banks reduce it from the interest accrued at the end of each year. However, the depositor has the option to opt out of TDS, and pay all the interest at the maturity. The form 26 AS, is linked to the PAN card of the depositor and shows all the TDS deductions made towards the FD.
Below are the TDS taxation rate conditions for FD
When interest from all FDs in a given bank is lower than Rs 10,000
O or nil
When the interest gains increase Rs 10, 000
When the depositor does not provide the PAN details
When the total income of the depositor, from all sources, is not more than 2,50,000 a year
O or nil
Note that if the FD depositor does not have an income of more than Rs 2.5 lakhs a year, no TDS will be deducted from the FD interest. In order to make sure that the bank knows about your low income (in the case of a housewife, and other low-earning people), submit the form 15 G and the From 15 H at the concerned bank branch.
Lower Interest Rate
While the FD can offer you a higher interest rate of 10%, the other investment avenues, including the mutual funds offer returns that can be more than 20% or 30%. While there are more risks associated with the Mutual Funds (MF), those with a higher risk appetite can make more profits by investing in an MF.
Interest Rate can be Lower than Inflation
Sometimes the inflation rate may be even higher than the interest rate of the FD.
No Increase in Interests
FDs have the same interest for their complete tenure. Hence the gains are fixed and would not increase.
FDs were earlier only good for short tenure savings, but now they have much greater tenures. While there are tax-free options (for example) PPF available, FDs can also be used for short-term savings, which can offer greater returns. The secure deposits provide for the tax exemptions and are especially useful for those who have a low-risk appetite but want greater interest rates.
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