Spend, Save and Invest Smartly

Know Fixed Deposits

Safety....Safety...Safety... your money needs to be safe. The first thing you look for in an investment. "Safe". One of the safest investments around "Fixed Deposit".You better know fixed deposits.

What is a fixed deposit?

You deposit your money with a bank for a fixed time period. The bank pays you interest on the money you deposit with them. You agree not to withdraw money from the fixed deposit for the time period you make the deposit. In case of an emergency (you need money in a hurry) you can break your fixed deposit (exit prematurely from the fixed deposit) by paying a penalty.

The penalty is as follows : Interest rate which is applicable for the time period of the fixed deposit – 1%. In a fixed deposit interest is paid to you on maturity (end of the term period of the fixed deposit).The interest on the fixed deposit and the time period is fixed and this means you know the amount you will get on maturity of the fixed deposit at the time of making the fixed deposit itself.

How is interest calculated on your fixed deposit?

You invest INR 1,00,000 in a fixed deposit .The rate of interest offered is 8%.You make a deposit for 5 years. How much money will you get after 5 years? One of the most common methods banks pay interest on your fixed deposits is on a quarterly basis.

Method of compounding: Quarterly basis

A = amount at the end of 5 years.

P = principal invested
R = rate of interest paid
N = 4(compounded for 3 months out of 12 months or 4 times a year)
T = time period of the investment= 5 years.
A = 1,00,000 (1+ 0.08/4) ^ (4*5) = INR 1,48,595.
You invest INR 1,00,000 which becomes INR 1,48,595 after 5 years.

• You have earned INR 1,48,595-1,00,000 = INR 48,595 as interest on your fixed deposit after 5 years.

Can you avail a loan against your fixed deposit?

If you avail a loan against your fixed deposit your loan is a secured loan (Collateral is the fixed deposit).This makes it cheaper than a personal loan which is unsecured (No collateral is given for a personal loan and so a high interest is charged on it). You can avail a loan against your fixed deposit to the extent of 80-90% of its value. The amount of loan you can avail against your fixed deposit depends on the bank you avail the loan from, as well as the quantity (size) of the fixed deposit.

If your fixed deposit is over INR 40-50 Lakhs then the bank might give you a loan up to 90-95% of the value of your fixed deposit. The maximum tenure of a fixed deposit is 10 years. You have to adjust your loan repayments within this time period. The average time period you make a fixed deposit is 2-3 years. You must repay your loan before the maturity of your fixed deposit. This means a short term borrowing of 2-3 years. This means you can only borrow (avail a loan against your fixed deposit) for a very short period of time.

How are your returns from an FD taxed?

Tax on FD :
You make a fixed deposit with a bank which pays you interest on the amount you deposit. The bank deducts TDS (Tax deducted at source) only on the interest you earn from the FD which is greater than INR 10,000 a year. The bank deducts a TDS of 10% on the interest you earn which exceeds INR 10,000 a year. The limit of INR 10,000 per financial year on the interest received is applicable for each branch of a bank and not for all branches of a bank taken together. The bank will deduct TDS only if the amount of interest paid to you from all fixed deposits in all its branches exceeds INR 10,000 in a financial year. If you do not furnish your PAN card details (Your PAN card details are not available with the bank) then the bank would deduct a TDS of 20% on the interest you earn which exceeds INR 10,000 a year. This means furnishing of PAN card details is in your best interest.

What happens if your income is below the minimum tax slabs?

Individual Tax Payers up to the age of 60 years: (Male/Female) :

Annual Income (INR) Tax Rate
0 - 2,50,000 Nil
2,50,001-5,00,000 10 %
5,00,001-10,00,000 20 %
Above 10,00,000 30 %

If you are under 60 years and your total income in the year is below the minimum tax slab ( < INR 2, 50, 000 a year) you can recover the TDS that the bank has deducted by claiming a refund when you file your taxes.
You can submit Form 15 G to the bank stating that your total income before deductions (Section 80 C and other deductions) for the year is below the minimum tax slab. The bank will not cut TDS on the interest you earn from your fixed deposit even if it exceeds INR 10,000 a year.

Senior Citizens between 60 - 80 years of age (Male/Female) :

Annual Income (INR) Tax Rate
0 - 3,00,000 Nil
3,00,001 - 5,00,000 10 %
5,00,001 - 10,00,000 20 %
Above 10,00,000 30 %

If you are a senior citizen (over 60 years of age) you need to submit Form 15 H to ensure that TDS is not deducted from the interest you earn from the fixed deposit. Even if the interest income and all other income you (senior citizen) earn exceed INR 3 Lakhs in the financial year you are still eligible for a TDS deduction on the fixed deposit if the total income after deductions (Section 80 C and others) is less than INR 3 Lakhs. You must have heard the famous saying "A penny saved is a penny earned". Fixed deposits help you save money and lead you to the path of riches.

Deposits and Bank Accounts
Fixed deposits