5 Facts To Keep In Mind While Investing In Fixed Deposits

Bank fixed deposits (FDs) are one of the most popular investment tools for investors due to their guaranteed returns and capital security. We all know that a Fixed Deposit locks up an amount of money for a fixed duration and a depositor gets the principle and interest on the maturity date. Generally, banks provide depositors with the option of investing their money for durations ranging from seven days to ten years. However, there are some other important aspects of bank FDs that investors should be mindful of, and they are:

Loan against the deposit amount

A loan against a fixed deposit account is one of the easiest methods to get funds in need. You have the option of taking a loan on your FD or withdrawing it early if you need money in a hurry. Normally banks may lend you loan amounts that vary from 86% to 95% against your FD. The relevant Certificate of Deposit or CD is pledged with the bank until the loan amount is not reimbursed in the case of a loan against a fixed deposit. In the event that the loan is not paid, the bank has the right to reclaim the funds from the fixed deposit account of the holder or borrower. Once you establish a legitimate fixed deposit account with a bank, you will be eligible for a loan against a fixed deposit. The application process for a loan against a fixed deposit is simple and can be completed online.

To apply for this generally, banks require you to submit the duly filled application form along with Fixed / Term Deposit receipts. The loan amount provided varies from one bank to the next. If we take the State Bank of India as an example, the minimum/maximum amount that can be taken for a loan or overdraft facility is Rs. 25,000/Rs. 5 crore. That being said, the amount must not exceed 90% of the entire amount deposited. The repayment term is the time frame in which the loan amount, as well as any accrued interest, must be reimbursed to the bank. In the case of SBI, the loan amount must be repaid within 5 years for STDR/e-STDR and 3 years for TDS/e-TDR. On a loan against an FD, interest is levied on a daily reducing balance. In the case of SBI, a charge of 1% will be added to the relative time deposit rate. It is important to note, however, that the loan against the FD option is not available for tax-saving fixed deposits.

Interest income is taxable

Section 80C allows for tax deductions on 5-year tax-saving bank FDs of up to Rs 1.5 lakh every financial year. Individuals must pay full tax on interest received on bank fixed deposits, while older persons can receive a deduction of up to Rs 50,000 on interest received on savings and fixed deposits. Interest income from tax-saving FDs, on the other hand, is taxable according to the depositor's tax bracket. Interest income must be reported under the heading "Income from other sources," and elderly individuals can claim a tax reduction under Section 80TTB. As a result, investors seeking better tax-free returns from their fixed income tax saving strategies can favour small savings schemes such as Sukanya Samriddhi Accounts and others.  

TDS on fixed deposits

FD interest is taxed with the relevant surcharge/cess as per your tax slab rate. TDS on fixed deposits (FDs) is 10% if the interest amount surpasses Rs 40,000 per year, which is applied in the fiscal year 2020-21. If you do not furnish your PAN Card to the bank, the TDS rate on fixed deposit interest is 20% under current Income Tax standards. TDS is not withheld on Time Deposits (FD) or Recurring Deposits (RD) placed at a post office. Senior citizens over the age of 60 can enjoy up to Rs 50,000 per year as tax-free income from FD. Form 26AS includes details about the TDS levied by the bank. If your total annual income is less than Rs 2.5 lakh, you can submit form 15G/15H at your concerned bank. This ensures that the bank will not subtract TDS because your income does not fall under the taxable brackets.

Premature withdrawals

Investors often choose their FD duration based on the highest possible interest rate, disregarding premature withdrawal options. As a result, unexpected events or unmet personal plans can cause customers to prematurely withdraw FDs, incurring a penalty of up to 1%. Premature withdrawal options on fixed deposits allow the account holder to close the account before the maturity date. This is a great relief during times of financial difficulty. As a result, the depositor will be required to pay a set amount as a penalty to the bank. For the duration, the FD remains with the bank, the effective interest rate will be lower than the effective rate applicable at the time of placing the FD. In the instance of an SBI fixed deposit, the applicable interest rate will be 0.50-1 per cent lower than the applicable rate at the time of placing the FD for the duration the FD stayed with the bank, or 0.50-1 per cent lower than the contracted rate, whichever is lower. The bank would levy a penalty of 0.50 per cent for early withdrawals on retail term or fixed deposits up to Rs. 5 lakh for all tenures. The relevant penalty for retail fixed deposits with a balance of more than Rs. 5 lakh but less than Rs. 1 crore is 1% for all tenures.

DICGC insurance cover

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India, provides deposit insurance for deposits made with authorized banks. In the event of a bank collapse, the insurance scheme would cover bank deposits, which comprise fixed deposits, savings accounts, recurring deposits, and current accounts, up to Rs 5 lakh per depositor. This insurance scheme covers both the interest and principal amount of bank FDs. Investors who don't want to bear risk can enjoy fixed deposits as they can ensure optimum capital security by spreading their FDs among various banks up to a limit of Rs 5 lakh. Though long-term returns of debt and equity mutual funds have outperformed FD returns by a massive percentage, investors' primary concern should be always capital security, which always comes first before higher yields.