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Bank Fixed Deposit Rules: What You Need To Know

Joan Mathews Joan Mathews 25 September 2019

Fixed deposits are risk-free investment instruments offered by banks and NBFCs, where money can be deposited for a high rate of interest. Read this article to know some of the important rules & conditions associated with fixed deposits.

Fixed Deposit Rules

Individuals looking for secure investments largely tend to prefer fixed deposits, which provide assured returns post maturity. FDs offer financial stability when compared with equity or mutual fund investments, where the returns are dependent on market performance. On the other hand, fixed deposits are not subject to market risk, and are therefore most suitable for those whose risk appetite is low. Prior to choosing this investment route, it is essential to note everything there is to fixed deposit accounts. In this article, we have covered some of the important conditions associated with fixed deposits that individuals must be aware of before investing their hard-earned money.

Interest Income is Taxable

The interest earned on fixed deposits shall be added to one’s total income and taxed as per the individual’s income slab. This will appear under the head ‘Income from Other Sources’ in the individual’s Income Tax Return. The bank will deduct tax at source (TDS) at the rate of 10% if the interest earned for the year is greater than Rs 40,000. In case the individual has not provided his or her PAN, the bank will deduct TDS at the rate of 20%.

FD account-holders who do not fall in the taxable income bracket can submit Form 15G or Form 15H (for senior citizens) to avoid TDS. These declaration forms are valid for one financial year. Therefore, entities will need to submit them every year at the start of the financial year. Now, there are some conditions that a user will need to fulfil to submit these declaration forms. They include:

  • The entity is a HUF or individual.
  • The entity must be an Indian individual.
  • The tax calculated on total income is zero.
  • The total interest income for the year is below the basic exemption limit of that year, which is Rs. 2.5 lakhs for FY 2019-20.

Loan Facility against Fixed Deposits

Most banks allow loan facility against 70% - 90% of the value of the fixed deposit amount. It must be noted that there is no standard rate on the loan amount that can be sanctioned. It will be different from bank to bank, and be dependent on the amount deposited. The interest rate for a loan on a FD is generally around 2 percentage points above the interest paid on the deposit. However, this might change on the basis of the bank’s policies. The overdraft can be foreclosed without attracting a penal charge. Additionally, there is no fixed term for the loan repayment.

Loans are provided only against deposits that are free from restraint, lien or encumbrance. Also, it must not be in a minor’s name. If an FD account is jointly held, all the account-holders need to provide their signatures on the loan documents. The liability to repay the loan lies with all the account-holders of the fixed deposit.

What happens if you Break FD before Maturity?

Breaking an FD means making withdrawals from a fixed deposit account before its maturity. Two things happen when one chooses to undertake this action - the account-holder will get a lower rate of interest and he or she will have to pay a penalty for making the premature withdrawal. The penalty charged for breaking an FD can range from 0.50% to 1% of the amount deposited. The interest payable by the bank (when a premature withdrawal is made) shall be as per the rate of interest applicable for the tenure during which the deposit remained with the bank.

Investing in Fixed Deposits

This investment route is recommended for ultra-conservative investors, who are seeking fixed and assured returns with high safety. Retired individuals who need regular income, depend heavily on bank fixed deposits. While safety and fixed returns suit the needs of the retirees, the simplicity of operation also makes it a reliable avenue.

Almost all banks in India provide users the facility of opening a fixed deposit account. The terms and conditions, as well as the interest rates, will vary from one banking institution to another. It is therefore necessary for individuals to compare the FD schemes of banks and accordingly decide which institution to go ahead with. Opening an FD account is easy - one can simply head to the nearest branch or place a request through the net-banking account of the respective bank.

Recommended Read: SBI vs Axis Bank vs PNB Fixed Deposit Rates

Joan Mathews
Written by Joan Mathews
Joan has over 4 years of experience writing for the BFSI industry. She enjoys watching mystery TV series, listening to 80s classics and spending time with her furbabies.