Fixed deposits:The US Federal Reserve cut its interest rates by 50 basis points i.e. 0.5 percent in September this year. After which it was being speculated that the Reserve Bank of India (RBI) may also cut the rates. The reduction in repo rate would have benefited existing or new loan takers, especially those who have already taken loans at floating interest rates. On the other hand, fixed deposit accounts opened after the rate cut are more likely to get lower returns. In fact, due to the cut in repo rate, most banks decide to reduce their FD rates. Due to which the earnings of investors investing money in FD also reduce. Although many banks are still offering better returns on FD, in such a situation investing money in FD can be beneficial for investors.
Fixed deposits are a popular option for investment that helps keep your money safe and earn interest. To get good returns on your savings, before investing money in the FD scheme of any bank or financial institution, understand the reasons and benefits here.
Insurance of Rs 5 lakh is available on investment in FD
Insurance cover is available on FDs deposited in banks by the government organization DICGC. This insurance covers every investor’s FD, recurring deposits i.e. RD, savings and current account deposits up to Rs 5 lakh in case of bank default. Under this plan, both principal amount and interest are covered. The purpose of this insurance is to protect the interests of investors in case of bank default.
At present, compared to government and private banks, small finance banks are offering about 1 to 1.5 percent more interest on FD. These banks include Suryoday Bank and Unity Bank, which are offering interest at 8.25% per annum on FDs with tenure of 5 years or more. This insurance cover is available on deposits in every scheduled bank. On this Gaurav Agarwal, Chief Business Officer (Unsecured Lending), Paisa Bazaar It is advised that to avoid risk, investors can increase the scope of insurance coverage by investing their hard-earned money in FD schemes of different banks.
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You may have to pay penalty for making this mistake
Banks offer FD schemes of different tenures for investment. Some bank schemes provide the facility to withdraw money before maturity. But many times investors ignore the liquidity (facility of withdrawing money before maturity) and investment period and choose that FD scheme on which they are getting more interest. Such investors are later forced to break their FD before maturity in case of emergency. Let us tell you that many banks and non-banking financial companies (NBFCs) charge a penalty of up to 1% on premature or partial withdrawal. This charge is deducted from the current FD rate. Which is usually lower than the contacted FD rate and the interest is calculated according to the interest rate applicable for the period for which the FD remained open. In such Gaurav Aggarwal It is said that to avoid the penalty for surrendering FD before maturity, the investor must keep in mind the liquidity conditions and investment period of any bank before keeping the money in its FD scheme.
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Tax free income is not available on tax saving FD.
Under Section 80C of the Income Tax Act, a maximum tax exemption of Rs 1.5 lakh is available on tax saving FD in a financial year. The lock-in period of these tax saving FDs is 5 years. However, like other FDs, tax has to be paid on the interest income from tax saving FD as per the tax slab of the investor. Only senior citizens get the benefit of tax-deduction under IT Act 80TTB section on tax saving scheme. Under this section, senior citizens get tax benefit up to a maximum of Rs 50,000 on the interest received on deposits (including FD) in both banks and post offices.
Generally, the amount received after paying tax from tax saving FD often fails to beat inflation, especially for people in high tax slabs. Therefore, such people can save by investing in schemes like PPF, NSC and Sukanya Samriddhi instead of tax saving FD. These schemes provide good returns along with tax benefits under Section 80C. Apart from this, those who have the ability to take more risk and also want to earn higher returns can invest in Equity Linked Saving Scheme (ELSS). Its lock-in period is 3 years. Which is the scheme with the shortest lock-in period among the schemes that provide tax deduction benefits.
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Helps in improving credit score
Many banks offer facilities like secured credit card and overdraft on FD to their investors. Loan against FD is given in the form of overdraft only, which is a good option to meet financial needs in times of financial emergency. Under overdraft, interest has to be paid only on the amount used and after making the loan repayment, the investor gets back his pledged FD. The special thing about Loan Against FD is that you can fulfill your financial needs without breaking the FD and without affecting the returns on it.
Apart from this, people who are not able to get a credit card due to poor credit score or lack of other eligibility conditions can take a secured credit card in lieu of FD. This card is very helpful in building or increasing the credit score of the applicant. Because banks report the transactions done through secured cards to the credit bureaus. In this way, you can improve your credit score by using the card wisely. Apart from this, like Loan Against FD, interest is also available on the pledged FD.
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Tax liability does not end with TDS
Deduction of TDS by the bank does not eliminate the tax liability of FD investors. While TDS is deducted at the rate of 10% (20% for those who have not submitted PAN card), the interest income from FD is taxed as per the tax slab of the investor. Apart from this, if the interest income received on the amount deposited in bank FD during a financial year is less than Rs 40,000, then no TDS is deducted. The difference between the total TDS deduction and the tax applicable on FD interest income is adjusted while filing the Income Tax Return (ITR). Therefore, investors should always calculate the post-tax returns of their FD keeping their tax slab in mind. So that he can choose a better investment option for himself by comparing fixed deposits and other fixed income instruments (debt mutual funds, bonds etc.).
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Ultimately, the good returns on FD may diminish in the next few months. However, investors should not ignore liquidity and short term financial goals to meet their financial needs while choosing an FD tenure that gives high interest. Apart from this, investors should invest in FDs which give returns at rising inflation rate, even if it is offered by a small finance bank. If the investor’s bank allows him to take loan against FD and secured credit card against FD, then the investor can easily improve his credit score and achieve short term financial goals without surrendering the FD.