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Term Deposits, also known as Fixed Deposits (FDs), are the most common instruments of saving and investment for the masses in general. A fixed deposit comes with a predefined rate of return (interest) and maturity period. Apart from savings, they offer numerous additional benefits. Investors can earn interest on a monthly, quarterly, semi-annual and annual basis, as per their convenience. The investment horizon ranges between 7 days to 10 years. All banks offer the facility to open FDs from the bank branch, online as well as through mobile/phone banking applications. Also, tax saving FDs qualify for tax deductions under Section 80C of the Income Tax Act, 1961.
Here are a few important rules & regulations regarding Fixed Deposits:
TDS is deducted by the bank on your deposit at the time the interest is credited to your account and not at time of maturity. A TDS of 10% is applicable if the FD interest amount exceeds Rs. 10,000 (this limit has been hiked to Rs. 40,000 for individuals and Rs. 50,000 for Senior Citizens in the interim budget for 2019). In case the Permanent Account Number (PAN) is not provided to the bank, a TDS of 20% will be charged. There is nil TDS applicable on Post Office Term Deposits (POTD).
The interest earned on Fixed Deposits is fully taxable. It is determined as per your tax slab bracket along with surcharge/cess. For example, if you file an ITR of upto Rs. 10 lakhs, the amount of interest earned by your FD will form a part of your taxable income of Rs. 10 lakhs and taxed as per the applicable tax rate.
Note: To prevent banks from deducting TDS, you are required to submit Form 15G/15H. These are self-declaration forms which state that the interest income earned is less than the taxable limit.
There is nil TDS applicable on the FD interest of senior citizens, provided the interest amount does not exceed Rs. 50,000 in a financial year.
Senior citizens are eligible for a tax deduction of up to Rs. 50,000 on the interest income earned from fixed deposits (as per Section 80TTB).
Only tax saver FDs qualify for a tax deduction of invested amount of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act, 1961.
This is a protection cover that you get on your deposits in banks. This facility is provided by Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the Reserve Bank of India (RBI). The DICGC ensures that each depositor in a bank is insured up to a maximum of Rs. 1 lakh for both principal and interest amount.
All banks provide this particular feature. An individual can take a loan of up to 90% of their FD amount/principal amount. The bank charges one percent higher interest than the interest earned on fixed deposit.
Banks aggregate interest income on all FDs across its various branches. This method enables banks to check if the interest income for the year is more than Rs 40,000/50,000 or not. The same applies for Recurring Deposits (RDs).
If you earn interest at the end of tenure on a cumulative basis, you are required to declare the interest income every year, as your bank may be deducting TDS (if applicable) and depositing under your PAN.
Can we withdraw money from a fixed deposit before maturity?
Yes you can withdraw money from your FD before maturity, but you will have to pay a standard penalty as per the banks discretion.
Can I open multiple FD accounts?
Yes, you can open multiple FD accounts across all banks.
Can fixed deposit be used for tax exemption?
Yes, but only tax saver FD is applicable for tax exemption.