When investing money, bank fixed deposits or term deposits are one of the preferred safe investment options in India. It offer risk-free investment when compared with options such as stock markets and mutual funds. You have your original investment safe and a guaranteed return at the end of the deposit tenure. Some additional fixed deposit options are available as National Savings Certificate and Kisan Vikas Patra offered through the Indian postal department.
Here are the main salient points about you need to know about bank fixed deposits.
Types of Fixed Deposits
In general, there are two key types of fixed deposits or term deposits – fixed deposits and recurring deposits.
A fixed deposit is where you invest a set amount for a fixed tenure, which can be a week to a few years. For example, you invest Rs 100,000 for a period of 7 days.
A recurring term deposit involves a fixed tenure but the total amount is invested in fixed amounts over a period of time. For example, a recurring deposit can have a monthly investment of Rs 10,000 or a weekly investment of Rs 5,000 or a quarterly investment of any amount.
National Savings Certificate (NSC) and Kisan Vikas Patra (KVP) offered through the Indian postal department are also fixed deposits, which are offered with a set tenure (6.5 years) and at an interest determined by the government of India. You do not have the flexibility of choosing your investment tenure here. These deposits are backed by the government of India and are also eligible for tax deduction under Section 80C of the Income-Tax Act.
Fixed Return on Investment
Bot fixed term deposits and recurring term deposits have a fixed rate of interest. You invest your money in a bank fixed deposit for a fixed tenure. In return, banks pay a fixed interest. Such term deposits are very safe option as there is no fluctuation in the interest rate payable to you. For a long tenure fixed deposit, banks generally offer a higher interest rate. Even when you deposit a bigger amount, the interest rate is higher. Also, senior citizens generally get a higher interest rate. Recurring deposits offer a lower interest rate compared with fixed deposits.
Tenure of Fixed Deposits
When investing in a fixed deposit, you can choose any investment tenure. The investment period can be as short as 7 days and as long as 10 years. You can also sweep your money in savings deposit into a fixed deposit via online banking easily. This helps you earn higher interest on your savings that is left idle in your bank account.
Interest Payout on Fixed Deposits
When investing in fixed deposits, you can choose the interest accrued to be paid at regular intervals or get reinvested. You can opt for interest payments on quarterly, half-yearly or annual basis. If the interest is reinvested, you get the compounded interest income on your fixed deposit at maturity of your fixed deposit.
Premature Withdrawal or Breaking a Fixed Deposit
Fixed deposits are not to be withdrawn during the investment period. However, if there is some urgent need that requires you to get the money invested in a term deposit or NSC or KVP, you can break the fixed deposit and withdraw your deposit amount prematurely. However, you will not be entitled to the entire interest earning. Banks will pay you a lower interest rate on your investment tenure as a penalty for early withdrawal.
Overdraft Against Fixed Deposit
If you need money without withdrawing your fixed deposit, you can borrow from banks against your fixed deposits. This is called the overdraft facility against fixed deposits. The amount of loan will depend on your investment and also charged at a higher interest rate. This option can be useful when you need money only for a short tenure.
Tax on Fixed Deposits
Interest income from fixed deposits are taxable. The interest earned from fixed deposits is included in your annual income for the purpose of taxation. The tax liability depends on your tax bracket. For example, if you fall in the 10% income tax bracket, your interest payments would be taxed at the same rate.
TDS on Fixed Deposits
If your total interest payment in a year exceeds Rs 10,000, bank deduct tax at the rate of 10% as tax deducted at source (TDS). So, a portion of your tax liability on your interest income is already paid if it’s more than Rs 10,000 from one bank in any year. When filing your tax return, make sure to incorporate the TDS payment details so that you do not end up paying the portion of tax already deposited by your bank.
If you submit the Form 15G/H to your bank stating you have no taxable income, the bank will not deduct any TDS. Make sure that you submit this form only when your total income including interest income from fixed deposits is not likely to exceed the taxable income limit.
Tax Deductions on Fixed Deposits
Banks offer many fixed deposits for tax-saving purposes as well. Tax-saving fixed deposits have a minimum investment tenure of 5 years and a maximum of 10 years. You can only claim tax deduction for such fixed deposits up to Rs 1.5 lakh only. The interest earned from such deposits is still taxable.