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  • Taxability on Fixed Deposit
  • Benefits of Fixed Deposit(FD)
  • What are the risks of investing in bank fixed deposits
  • Reinvestment risk
  • Flexible Tenures
  • Easy to Withdraw
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What is a Fixed Deposit?

A fixed deposit is a financial instrument available at any bank, where an individual can save a part or all of his savings. You can deposit the amount with a bank/lender for 1 month to 10 years. This can earn you a fixed sum as interest monthly/quarterly/annually

What are the risks of investing in bank fixed deposits?

Bank fixed deposits (FDs) can be easily liquidated. However, a penalty could be levied. Tax saver FDs cannot be withdrawn before completion of the 5-year tenure.

Bank defaults are rare but possible. However, deposit amount including interest of up to Rs 5 lakh per person per bank is guaranteed by the  DICGC and any amount over that is subject to default risk.

FD returns at times can be around the same as inflation or even lower than inflation rates leading to wealth erosion for the investor.

Bank FDs carry the risk of being locked in for a long tenure at low rate of return.

In a falling interest rate environment, FDs that are due to mature will get offered a lower rate at the time of maturity.

Benefits of Fixed Deposit(FD)

If you invest your money in a fixed deposit account, you are assured a return. You will earn interest on your deposited amount, but the rate of interest depends on the tenure you have chosen. Banks in India are offering around 7% to 8% interest on Fixed Deposits at present.

FDs allow you to choose how you wish to receive interest. You can choose to be paid annually, monthly or during maturity.
Fixed Deposits have flexible tenures. You can open a FD account for as less as 7 days. The tenure options are not the same for every bank. Also,it is not mandatory for you to have an account with a particular bank to open a FD account with it.
During emergencies when you are in need of money, a FD can help you a lot. Many banks offer loans against Fixed Deposits. Up to 90% of the deposit can be availed as loan. Some banks allow partial withdrawals of FDs as well.
Financial instruments such as mutual funds, gold, etc., may provide high returns, but are also very risky. To adjust this market risk, it becomes important to invest in debt instruments. FDs will help you manage this risk as the returns are fixed.
You can withdraw the amount you have deposited in your FD account at any time. For premature withdrawals, banks may charge you a small penalty.
Fixed Deposits help people in developing a habit of saving money. When you invest a certain amount in FD, that amount cannot be used until you withdraw it or maturity. These are some of the benefits of investing in fixed deposits. You can open a FD at any time and the application process is also very simple. Just make sure that you select the right tenure.

Taxability on Fixed Deposit

The interest earned from fixed deposit is taxable. The tax deducted at source on FD can range from 0% to 30%, depending on income tax bracket of the investor. Financiers deduct 10% TDS if your interest earned is more than Rs. 10,000 in a year, if your PAN details are available with them. However, in case your PAN details are not provided to your financial institution, 20% TDS will be deducted. If your total income is below the minimum tax slab of 10%, you can claim a refund of the deducted TDS. You can also avoid the deduction by submitting Form 15G to your financial institution, and submitting Form 15H if you’re a senior citizen. If you fall in the higher tax bracket (20% or 30%), you would have to pay extra tax over and above the TDS deducted by your NBFC or bank.

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