Everyone at each and every stage of life needs money. Some people are lucky and have enough but mostly everyone needs to work hard and save and invest to ensure a secured future. It was a problem to find efficient saving instruments in the past, but now you have umpteen options and can choose the one best suited to your needs. You can use any option to save and build your corpus of savings. You can invest in mutual fund or real estate or stock markets and of course the conventional way of fixed deposits.
A fixed deposit is a saving instrument where you can deposit a sum of money for a fixed period of time and you get can earn interest on the same. On maturity of the fixed deposits, the depositor gets back the interest earned along with his principal amount that he had invested.
Reasons to Invest in Fixed Deposits
A fixed deposit is one of the most popular saving schemes in the country today with most of the banks and financial institutions offering the same to its customers. Some of the reasons to invest in fixed deposits are as follows:
- As you get assured returns once the fixed deposit matures, it is known to be one of the safest options available for investment. Most of the other saving schemes have a risk attached to them and there is no assurity on the returns. Whereas in fixed deposits you will get guaranteed returns.
- As compared to a regular saving account, the rate of interest on fixed deposits is higher. As you deposit the money for a fixed tenure, the banks offer a higher rate of interest.
- Fixed deposits can be a savior if you suffer from a cash crunch. You do not need to take a personal loan at a very high rate of interest in times of an emergency as you are eligible to take a loan against your fixed deposit. You can take a loan for an amount of 90% of the amount invested in fixed deposits.
- Fixed deposits are flexible and this is one of the main advantages. You can decide the amount you need to invest and also the time period for which you can invest. You can choose any period from 7 days to 10 years. You can start investing with a low amount and there is no compulsion to pay a certain amount monthly or annually. This gives a lot of flexibility and also helps to start saving with smaller amounts. Also, though the amount is invested for a fixed period, there is an option to withdraw the money before the maturity of the deposit which also comes in handy at the time of an emergency.
- The saving instrument is helpful in inculcating the habit of saving.
Under the Income Tax Act of 1961, any income that is earned as interest on fixed deposit is not tax free and is taxable. The rate of tax that is levied on the interest is dependent on the slab under which the investor falls. As per the law in India, each individual pays taxes depending on his annual income and the same tax rate is levied on fixed deposits. The tax rate in the country varies from 0% to 30 % with some slabs also being including a surcharge.
The banks can cut TDS or tax deducted at source at a rate of 10% on fixed deposits. The limit for each bank is Rs. 10,000 and if the amount exceeds this figure, it needs to be paid at the end of the financial year. When the interest income exceeds Rs.10000 the bank pays the TDS. If the cumulative interest from all banks is Rs.10000 and is not earned from one bank, you might not be charged TDS by the bank. On the amount, you earn on your fixed amount as interest, the bank makes the tax payment and this is shown in the income tax returns you file every financial year.
Though the interest on fixed deposits is taxable, there are several ways in which you can reduce the tax outgo or save it. Some of the ways in which this can be done are:
- One of the best and easiest ways to reduce taxes on fixed deposits is to invest in names of family members like spouses, parents etc. The tax on fixed deposit interest income is calculated for an individual and the tax they are charged depends on the slab rate under which they fall. This can be explained through an example. If you wish to invest Rs. 15,00,000 in fixed deposits which give an interest of 10%, the interest earned will be Rs. 1,50,000 and the TDS that you are liable to pay is Rs. 15,000. Now instead of depositing all this amount in your name, you deposit Rs. 5,00,000 each in the name of your parents, spouse and yourself, the TDS per fixed deposit comes to Rs. 5,000 which is not payable as the bank branches only charge TDS when interest exceeds Rs. 10,000.
- If you submit or use form 15G/15H, you will not have to pay any tax as this implies that your income does not fall in the taxable slabs and you are not liable to pay any taxes.
- If you open fixed deposits in different branches and in different banks, it can help you to save or reduce the taxes. Explaining this with an example, if you want to invest Rs. 15,00,000 you will need to pay a TDS of Rs. 15,000 which is calculated at the rate of 10% on the interest income which also we have assumed to be 10%. Now if you make two fixed deposits in two different banks of Rs. 7,50,000 each, you TDS for each will be Rs. 7,500 and as the amount in the bank does not exceed Rs. 10,000 the bank will not charge any TDS.
- You can manipulate the taxes also by investing at the right time of the year. The TDS can be avoided if you deposit the amount in a fixed year closer to the end of the financial year or middle of the year like in September or October. As the TDS is calculated for every financial year, the TDS will be distributed in two years and you can save money. One thing that has to be kept in mind here is that this will only work for the fixed deposits which have a maturity of one year.
There are some important things which you need to know about tax deducted at source on fixed deposits which will help you take better decisions and invest in a sensible way. Some of these are:
- Essentially TDS is a method used by the Income Tax Department to automate tax collection to a certain extent. A part of the tax that you are liable to pay on your interest earned on fixed deposits is partially paid via TDS and the balance, if any, is paid by the individual as self-assessment tax.
- The TDS that the bank charges is at the rate of 10%. However, this is the rate if the banks have your PAN card in their records. If your PAN number is not available to the bank in their records, the TDS will be deducted at the rate of 20%.
- If you do not fall under any income tax slab, the TDS, if charged by the bank, can be requested back as a refund while filing income tax returns
- The IT department has given a concession to senior citizens by exempting them from paying any TDS on fixed deposits. To make sure they are not charged TDS on their fixed deposits they need to submit form 15G.
- If you fall under the higher income tax slab rates of 20% and 30% you will need to pay the tax over the TDS charged as self-assessment tax.
- You cannot save taxes if you invest in a tax saving fixed deposit. The only difference that lies is here the amount you invest in FD is exempted under section 80C and can be claimed as a deduction at the time of tax filing.
The banks calculate TDS at the time the interest is due for the deposit and the not when they pay it. Thus, the tax on the interest income should be paid annually and not at the time of the FD maturity.
Fixed deposits are undoubtedly still one of the safest ways to save and invest money and are extremely flexible too. The interest income is taxable and thus, one needs to be very careful while investing and know the ways to reduce or save money on taxes. A smart decision to invest in a sensible manner will not only help you save huge amounts but will ensure a happy and secured future.