BASIC GUIDE TO FIXED DEPOSITS IN INDIA

Fixed deposit is an investment plan for a fixed term that helps investors earn relatively higher returns compared to a savings account. On a principal amount, interest is accumulated every year for a specific time period. 

The FD interest rates fluctuate depending on the lenders. Investors avail the benefits of FDs from the public and private sector, or small finance banks. Unlike other forms of investment, fixed deposits offer funds’ liquidating anytime.

Usually, senior citizens get a higher rate of returns than customers below the age of 60.

Types of Fixed Deposits

  1. Standard Term Deposits

In standard fixed deposits, the investments are made for a specific period by the investors. This savings scheme allows deposits from 7 days and is extendable up to 10 years on predetermined interest rates. Interest rates depend on the banks or institutions providing this scheme.

  • Senior Citizen Fixed Deposits

Senior citizens avail the benefits of attractive interest rates from the banks and NBFCs. These entities offer 0.25-0.50% additional interest rates to the senior investors with tax benefits. If the FDs of senior citizens don’t exceed a limit of Rs. 50,000 in a year, the interest rates don’t add a TDS while other investments don’t offer this benefit to seniors.

For investors below 60 years, the TDS limit is Rs. 40,000 a year. FDs of senior citizens reduce the tax charges thereby increasing the returns.

  • Tax saving deposits

Some of the tax-saving FDs are eligible for tax deductions that mature in 5 years. An annual deposit of up to Rs. 1,50,000 is eligible for tax deduction under section 80 C of the Indian Income Tax Act.

Many banks offer lucrative interest rates. For eg. India’s leading bank’s – SBI FD interest rates usually range from 2.90%-5.40% which changes from 3.40%-6.20% for senior citizens.

  • Periodic deposit

In periodic deposits, the investors can deposit a fixed amount on a monthly or quarterly basis for a particular period with a fixed interest rate. At the end of maturity, you collect your deposits with the calculation of the proportionate interest.

  • Flexible fixed deposit

A flexible deposit account is linked that can withdraw funds automatically from your bank account to FD account beyond a predetermined feature. In simpler terms, if an account holder wishes to keep a balance of Rs. 50,000, then any amount apart from this, will be transferred to fixed deposits.

Conversely, the banks liquidate FD funds if your account balance falls below the maintained limit.

Flexi deposit accounts offer higher interest rates than the savings account but comparatively lower than standard fixed deposit rates.

  • FD for NRIs

NRIs (Non-Resident Indians) are eligible to invest in fixed deposits in India in the form of NRE (Non-Resident External) or Non-Resident Ordinary (NRO). Indian citizens earning in foreign currency can open their FD accounts in NRE. despite currency fluctuations, the principal, matured amount, and interest rates in NRE FDs are not taxable.

Contrarily, the NRO FD deposits are in Indian or foreign currency which is taxable at 30% annually.

  • Corporate fixed deposits

Fixed deposit schemes are offered by various companies and corporate entities in India. These entities have higher risks associated although they offer higher rates of interest in comparison to banks and NBFCs (Non-Banking Financial Corporations). They support your deposits with additional insurance benefits from DICGC (Deposit Insurance and Credit Guarantee Corporation) while corporate FDs don’t offer such benefits.

In case, if a company is at the edge of bankruptcy, the investors won’t get guaranteed returns from the corporate FDs.

Why should you invest in a fixed deposit?

Fixed deposit is a great tax saving scheme in India offering the following advantages:

  1. Assured Returns

While starting a fixed deposit, the interest rates are fixed in the initial stages of investment. Regardless of the fluctuations in the market, the FD interest rates don’t vary till the amount gets matured. This strategy helps the investors to formulate better financial planning.

  • Tenure flexibility

Fixed deposits provide short, long, and medium-term flexibility. A flexible range from 7 days to 10 years is the flexible tenure that banks and NBFCs offer.

  • Lucrative interests for senior citizens

The citizens at or above the age of 60, avail of additional FD benefits more than standard deposit interest rates which range from 0.25%-0.65%. At present, senior citizens get a benefit of up to 8%. 

Is investing in corporate fixed deposits worthwhile?

All the NBFCs or corporates offering tax-saving schemes like fixed deposits have to abide by stringent rules regulated by RBI (Reserve Bank of India) and the Ministry of Corporate Affairs. Corporate FDs get ratings from agencies such as CRISIL, CARE, and ICRA.

AAA is considered to be the highest rating among AA, A, or BBB ratings. To note, the companies with a minimum BBB rating are eligible to accept the deposited amount.

TDS in Fixed Deposits

  • If the cumulative interest income from FDs is below Rs. 40,000 for individuals below 60 years and Rs. 50,000 for senior citizens in a year then TDS is not applicable on fixed deposits.
  • On the estimation of interest income from all FDs, if the amount exceeds Rs. 40,000 or Rs. 50,000 then the banks deduct 10% TDS.
  • If taxpayers don’t submit PAN details or fail to show an accurate PAN, it’s a call to deduct 20% TDS on the interest on FDs.
  • If an individual earns Rs. 2.5 lakhs in a year, his/her income doesn’t fall in the perimeter of tax deductions.

Calculation of Interests on FDs 

Fixed Deposits are taxable based on the slab rates including surcharge and cess.

For simple interest FDs,

M = P + (P*R*T/100) where,

M = Maturity Amount

P = Principal Amount

R = Rate of Interest

T = Tenure (in years) of Investment

For compound interest FDs,

M = P + P{(1+i/100) t – 1} where,

I = Rate of interest and the other variables represent the same values as mentioned above.

Conclusion

Citizens of India have multiple options to invest in tax-saving schemes. Fixed deposits are one of the safest investment schemes to get higher returns. Though fixed deposits offer lesser liquidity but higher interest rates. Investors can invest in various schemes that best fit their budget and yield higher ROI (Return on Investment).