Investing in Fixed Deposits - Banks
Source - Team Crawfin/ Harshal Jawale, CFPCM
Most investors today are refraining to invest into equities and are looking to increase exposure to fixed deposits. Though it is sensible to lock in surplus funds at higher interest rate which may be just peaking out, here we lists few things that you must know before investing into fixed income options –
- Fixed deposits are not completely safe
Before this recession investors used to think that fixed deposits are the safest option. Banks all over the world of all sizes when forced to shut down, we realized that even FDs are not safe. In fact when banks go bust we may even loose principal amount (forget returns). In India we may not have faced such situation (thanks to RBI) except some co-operative banks but then such situation always come as a surprise. We also have Deposit Insurance and Credit Guarantee Corporation (DICGC) that insures deposits of up to Rs 1 lakh per customer across all branches of a particular bank.
- Premature withdrawal attracts penalty
We often tend to book FD for higher duration because it offers 25-50 bps (0.25%-0.5%) extra. But we also need to note that if we happen to break FD before maturity then bank usually slap 100 bps penalty lowering our effective return. So most advisors recommend us to book FD for shorter duration and then renew. We disagree with this, as it may sound fit in theory but in practice it doesn’t work. We always recommend our investors to book FD for 3-5 years (tenure that offer highest interest rate). This is a tenure where usually investor has clear idea of his fund requirement plus we often seen that money just lies into saving account for many months. Instead we believe it is better to book FD for higher duration and then be ready to break FD if need arises. This also ensures higher interest rate earned which may not be available at the time of renewal.
- TDS is just an interim tax
As per present income tax guidelines, banks are required to deduct tax at source (TDS) on deposits if the total interest earned on all your fixed deposits in a bank is more than Rs.10,000 in a financial year. However, the depositors can claim the credit for such TDS in their income tax returns.
In case of resident individual and HUF, for a payments upto Rs. 10 lacs, TDS is deducted at a rate of 10.3% (including education cess). But this is not the complete tax liability against the returns earned. We need to include this interest income into our total income and pay tax according to our tax bracket. So if you fall in 30% tax bracket i.e. total income above INR 10 lakh/pa then you must pay remaining 20% (tax liability-TDS) tax amount before tax filling every year.
4. Form 15G & 15H
The form 15G and 15H are submitted to banks by depositors who DO NOT want TDS be deducted from their interest earned on fixed deposits. A person who is below 65 years can file the Form 15 G. In order to be eligible to furnish Form 15G, the non-senior citizen investor needs to fulfill the following two conditions:
§ The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil; and
§ The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab
A person of 65 years or more is eligible to file Form 15 H This form can be submitted by senior citizen only if tax on estimated income of the senior citizen is NIL.
5. Flexi Fixed Deposit
Flexi-deposits are similar to savings accounts. The only difference is that on the basis of your regular cash needs, you could set a limit and instruct the bank to transfer the balance of your idle money to the term deposit.
This may be the best option to park funds as it provides liquidity plus term deposit interest rate. But they fail to realize that the term deposit rate which never shown clearly by the banks is actually rate for 90 days which is often 5%. According to us it is still a good product but only for short term where liquidity is preferred over return. This cannot be replacement to fixed deposit.
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