Fixed deposits (FD) are one of the most favored investment instruments in India. Fixed deposit can be defined as a financial investment where money is invested for a fixed tenure at a pre-agreed interest rate.
There are many varieties of FD schemes available in the market today, and an investor can pick one depending on its need and suitability.
Let us take a look at the various types of FDs available today:
Regular FD: In this type of FD scheme, the tenure is fixed for a period ranging 1 week to 10 years. The interest rate of each period is pre-determined, and an investor can choose to stay invested for a suitable period.
Tax saving FD: This type of FD scheme attracts investors who want to invest for saving income tax. There is a compulsory lock-in of five years under this type, and the fund cannot be withdrawn before completion of the period.
Special FD: In special tenure FD schemes, the fund can be invested for a special period like 333, 399 or 555 days, and rate of interest is higher.
Recurring deposit scheme: Recurring deposit (RD) scheme is another popular investment option available to investors today. Under this scheme, an investor can regularly deposit a fixed amount every month for a fixed tenure and at a pre-decided interest rate. The corpus keeps on growing every month towards the maturity period.
Floating FD: Under this scheme, an investor can opt for a market-based interest rate. The rate of interest is renewed automatically with the change in the base rate.
Important points for picking the right FD
Interest calculation: Interest varies, and monthly, quarterly, half-yearly and yearly calculations are available under different conditions.
Interest payout: An investor has the option to reinvest the interest earned and increase the FD corpus or to receive regular payouts every month.
Penalty: Some institutions penalise for breaking an FD before maturity by lowering interest rates. Investors can search for such banks/institutions that have the lowest penalty rates for pre-maturity liquidation of fixed deposits.
Tax deduction on FD interest
The interest earned under an FD is taxable under "income from other sources". The amount invested under 80C of the Income Tax Act is exempt but interest earned under such investments is taxable. If the interest earned under FD exceeds Rs 10,000 in a financial year, it would be eligible for tax deduction at source (TDS) at 10 per cent plus 3 per cent education cess, therefore a total 10.3 per cent of the interest earned.
For example, if an investor has earned Rs 20,000 as interest in one year, the bank would deduct Rs 2,000 and pay only Rs 18,000 as the amount that exceeds the limit of Rs 10,000.
The TDS limit for companies' deposit schemes is at Rs 5,000. It means if the interest earned from a company deposit exceeds Rs 5,000, the investor is liable for a TDS it.
NOW, HOW TO SAVE TDS ON FIXED DEPOSITS
There are multiple ways to achieve this. Here are four easy ways you can follow to save TDS on FDs:
1. By submitting Form 15G/15H
If an investor submits Form 15G stating that he has no taxable income, the bank would not deduct any TDS on the interest earned. For senior citizens, the requisite form to avoid TDS is 15H.
2. Distributing FD investment
Another way to avoid TDS is by splitting the deposit into separate banks in such a way that interest earned from any of the FDs does not exceed the Rs 10,000 limit.
3. Timing the FD
You can also save TDS by timing your FD in such a way that interest for any of the financial years does not exceed Rs 10,000.
For example, a 12-month fixed deposit of Rs 1 lakh at 10.5 per cent could be started in September as financial year closes on 31st March. This way, the interest would split in two financial years, and hence TDS will be avoided.
4. Splitting the FD
An individual can start one fixed deposit under his/her personal bank account and another one under an HUF account, and, so, both will be treated as separate. So an investor with an HUF identity can split the corpus under such two heads.
Fixed deposit is an all-time favorite financial investment instrument. It provides a handsome return as well as liquidity at the time of need to an investor. Looking at the volatility, high associated risk and less assured return by other financial instruments currently, the attractiveness of fixed deposits is set to grow in the future.
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