As the interest income is fully taxable and is barely able to beat inflation, the real return in bank FD is low or even negative at times.
Currently, bank fixed deposit interest rates are low but for many investors, they are still the first-choice to park surplus funds. There is, after all, an implicit assurance that the funds kept in a bank are safe and the probability of losing money is next to impossible. Hence, even if the rates of interest are low, at least the safety of money is there.
Many investors prefer keeping funds in fixed deposits, settling for lower rates rather than keeping funds in banks that offer a higher rate of interest in their savings account. If you are an investor with fixed deposits in a bank or are looking to open a fixed deposit account in a bank, here are a few key things to keep note of.
Why bank FD
A bank FD suits those who want to preserve the capital for a certain period. Money parked in a bank FD may not help you create wealth over the long term. The biggest advantage of bank FDs is that there is an assurance of a fixed return and the principal invested remains safe. Many investors only keep a portion of their funds required for emergency use in bank FDs along with keeping some portion in short-term funds or liquid funds.
How safe
Your money lying in a bank comes with a government guarantee of up to Rs 5 lakh. The deposit insurance of Rs 5 lakh is applicable on per depositor per bank basis and, therefore, is the aggregate of the amount across branches of the same bank. The bank deposits include money lying in the depositor’s savings account, current account, recurring deposit, bank fixed deposit which are insured by DICGC. Importantly, the limit of Rs 5 lakh includes the principal invested and the interest earned on the capital. For a higher amount, most investors spread the total amount across banks.
Real return
The bank FD interest income is fully taxable in the hands of the investor and banks levy TDS which may be adjusted while filing the income tax return. The amount of interest income gets added to the ‘Income from other sources’ and then taxed. As the interest income is fully taxable and is barely able to beat inflation, the real return in bank FD is low or even negative at times. There are several banks where you may open bank FD, opt for those offering a higher rate of interest.
Online FD
As a bank account holder, one would have already done the KYC and submitted PAN. For those having access to internet banking of a bank, investment in bank FD may be done entirely online. The investment amount can be directly transferred from the self account and the FD advice, a certificate showing the proof of investments gets generated immediately. On maturity, the redemption proceeds will go directly into the same account only. If there are banks offering a higher rate, opening a bank account online through video KYC has become much easier now.
TDS
In case you have bank fixed deposits where the interest earned is more than Rs 40,000 in a financial year, the banker will cut tax at source unless your income falls in the exempted slab. For senior citizens, the limit stands at Rs 50,000 in one financial year. The interest income from bank fixed deposits is subject to TDS at 10 per cent but can be deducted at 20 per cent if PAN is not furnished. For someone whose total income in a financial year is within the exemption limit, Form 15G/ Form 15H (by senior citizens) may be submitted by the depositor to the bank for not deducting TDS. If a deposit is for more than a year, ideally submit these forms every year in April.
