Nitty-Gritty of FDs

FDs (Fixed Deposits): A comprehensible approach towards defining the nitty-gritty of a popular investing instrument.

Fixed deposit (FD) is a financial instrument where a sum of money given to a bank, financial institution or company whereby the receiving entity pays interest at a specified percentage for the time duration of the deposit.

Fixed deposit, in fact, gives you a fixed interest either annually or on a cumulative basis. What's important to note is that this interest income is taxed on accrual basis. This means irrespective of when you receive it, you will have to pay tax at the end of the financial year. Even if it is not taxable, you still have to show it in your I-T returns.

There is no doubt that bank fixed deposits (FDs) are considered safe in that you will most likely get your money back. But did you know that bank FDs can negatively affect your savings over the long term?

Let’s try to answer this question,

Most FDs only give you about 8.50 % interest before tax and around 7 % after tax. This means, you are effectively losing money every year you invest your money in a FD.

In correlation with equity mutual funds, long term returns from which are tax free, FD interest is taxable at your current tax slab. The higher your income, the lower your FD return will be.

Now, another question ensued from these above answers. If FDs are pricey enough taking a long term perspective then where one should invest. Mutual Funds might be the answer. But let’s stick to the subject on which we are discussing.

Another aspect of the FD which is subtle is TDS. TDS or Tax Deducted at Source is the Income Tax department’s way of automating tax collection, to an extent. The tax on interest from any FD is paid partially via TDS deducted by the bank and the rest is paid as Self-Assessment Tax by the individual.

Banks deduct TDS on interest only if the interest amount for an F.D is greater than Rs.10, 000 per year. The rate of TDS deducted by banks is 10% on interest income, provided your PAN number is available with the bank. If the bank doesn’t have your PAN in its records, TDS is deducted at 20% on interest income.

If your total income is below the minimum tax slab (10%), the TDS on FD interest that is deducted by banks can be recovered by claiming a refund for the TDS amount at the time of tax filing. 

Alternately, You can submit the “Form 15G” to the bank declaring that since your taxable income for the year will be below the minimum tax slab, the bank shouldn’t deduct TDS on your FD Interest.

Senior Citizens are also exempt from paying TDS on FD interest as a special concession by the IT department. They need to submit Form 15H to ensure they aren’t charged TDS on their F.Ds. 

On the whole, one of the major benefits of FD is its liquidity. For any immediate requirement, it can be broken and the money is credited you're your account within a short span of time. With higher interest rates it is surely a good investment opportunity. Senior citizens, who generally get higher interest rates, will benefit if they fall in a lower tax slab. In a nutshell, one should invest in FDs, if one finds difficulty in comprehending the most elusive and volatile stock market.